By Huw Jones and David Milliken
LONDON (Reuters) -Investment funds and other non-bank financial institutions face their first 'stress test' next year to apply lessons from the near-meltdown in Britain's pension fund sector, the Bank of England (BoE) said on Tuesday.
The BoE had to step in from September to buy 19.3 billion pounds ($23.75 billion) of government bonds to stabilise markets after turmoil caused by the fiscal plans of Liz Truss's short-lived government.
Liability-driven investment (LDI) funds, used by pension funds to ensure their long-term payouts, struggled to meet collateral calls as bond prices tumbled.
The BoE's Financial Policy Committee (FPC), which monitors the financial system for risks, said on Tuesday the LDI crisis showed the need to test how non-bank financial institutions (NBFI) cope with stresses.
"The Bank will run, for the first time, an exploratory scenario exercise focused on NBFI risks, to inform understanding of these risks and future policy approaches," the FPC said in its half-yearly Financial Stability Report.
Further details will be set out in the first half of 2023.
"There is also a need to develop stress-testing approaches to understand better the resilience of NBFIs to shocks and their interconnections with banks and core markets," the FPC said.
Neil Birrell, chief investment officer at asset manager Premier Miton Group, said industry would probably react to news of the stress test with a "huge sigh".
"Another layer of regulation just causes more work. But on the other hand we as fund managers shouldn’t have anything to fear from all this because we are probably doing it all already," Birrell said.
The test will focus on the UK government and corporate bond market and its main participants such as banks, which play a core role in financing the UK economy.
Such market-based finance accounted for 776 billion pounds, or 55%, of all lending to UK businesses at the end of 2021 and nearly all of the almost 390 billion pound net increase in lending to the sector between the end of 2007 and end of 2021.
LDI funds are often listed in Ireland and Luxembourg, where regulators - along with their UK counterparts - have introduced quick fixes that forced funds to maintain far higher levels of cash.
They can now cope with a 300 to 400 basis point move in interest rates, well above the 150 basis point level held before September's turmoil.
NEW GUIDANCE
The FPC said it would work with counterparts in the European Union to come up with minimum cash buffer guidance on a longer-term "steady state" basis, which could potentially push up fees to absorb the cost or make the use of LDI funds unattractive.
Jonathan Lipkin, director for policy, strategy and innovation at the Investment Association, said the sector would work with regulators so that any risk measures put in place are proportionate.
Britain's pensions regulator is due to update its guidance to the sector, which could include the new steady state cash buffer levels, data reporting and requirements for fund trustees to speed up decision-making in a crisis.
The regulator said on Tuesday it would likely update its guidance for trustees using LDI in April, to ensure schemes have sufficient resilience.
The FPC said it also backed a call from the Financial Conduct Authority to regulate consultants who advise pension funds.
After regulators introduced tougher rules for banks in the aftermath of the global financial crisis more than a decade ago, attention is turning again to non-banks, such as funds and insurers, which account for about half of the global financial system.
Regulators worry there is too little data on hidden leverage in the system, as shown by LDI.
"The episode also exposed deficiencies in how banks monitor and manage risks with respect to LDI funds," the FPC said.
The FPC said there would be a consultation paper in 2023 on likely moves to require money market funds - which struggled when economies went into COVID-19 lockdowns in March 2020 - to hold more cash.
($1 = 0.8127 pounds)
(Reporting by Huw Jones and David MillikenAdditional reporting by Carolyn Cohn and Naomi RovnickEditing by David Goodman and Mark Potter)
The Bank of England is set to launch the first ever stress test on financial institutions outside the banking sector after the accurate mini-budget market turmoil that saw the near-collapse of some pension funds.
ore needs to be done to ensure that the non-bank financial sector is more resilient and does not pose a threat to the UK’s financial stability, the Bank’s Financial Policy Committee (FPC) said.
The Bank already stress-tests eight of the UK’s leading banks, such as Barclays, NatWest and Lloyds Banking Group, to determine how well they can withstand shocks to the economy.
It involves putting them under hypothetical worst-case scenarios like high inflation, spiking interest rates, high unemployment and economic decline, to see if they could still support households and businesses effectively.
We have now had a whole series of non-bank incidents across different jurisdictions, and I think it is absolutely critical to recognise that this a sector that is highly internationally diversifiedAndrew Bailey, governor of the Bank of England
But up until now there has been no such scenario for non-banks, such as pension funds, hedge funds, insurers, and private equity lenders.
The FPC said the stress tests will be exploratory and will take into account potential scenarios which go beyond historical experience.
It comes after yields on UK government debt surged to historic levels in September after former chancellor Kwasi Kwarteng’s disastrous mini-budget sparked market chaos.
The Bank of England was forced to step in and purchase about £19 billion worth of gilts to stabilise the market and prevent some pension funds from collapse.
In particular, it exposed the instability of liability-driven investment (LDI) funds – the investment strategies at the centre of the pension crisis, the FPC said.
It is important that these financial stability risks are avoided in the future, it stressed.
The governor of the Bank of England, Andrew Bailey, said there have been a number of “incidents” in the sector that need to be addressed, and the Bank needs to get a better understanding of what causes these.
He said: “The post-financial crisis reforms were very much, and rightly, focused on the banking sector.
I think the things we’ve seen... have made people much more aware of how liquidity resilience in non-bank finance can cause systemic issues, and I think there is much more of a will to solve these problemsSir Jon Cunliffe, Bank of England
“But we have now had a whole series of non-bank incidents across different jurisdictions, and I think it is absolutely critical to recognise that this is a sector that is highly internationally diversified.
“The pooled LDI funds, which were the main source of the challenge we had, are in almost all cases actually based outside this country. So that emphasises why it is so important that we take action.”
Sir Jon Cunliffe, the deputy governor for financial stability, stressed the exploratory nature of the stress tests and the importance of getting a bigger picture of how banks and non-banks work together.
He added: “I think the things we’ve seen… have made people much more aware of how liquidity resilience in non-bank finance can cause systemic issues, and I think there is much more of a will to solve these problems.
“But we’ll know by the end of next year what we’ve come up with.”
The Bank of England will test so-called shadow banking institutions such as pension funds, that played a key role in accurate UK bond market chaos, it said Tuesday.
The BoE was forced to buy UK debt in September in an emergency intervention to avert financial catastrophe, after a controversial tax-slashing budget by the government caused bond yields to soar and sparked panic.
The crisis, which sparked the downfall of former Conservative prime minister Liz Truss, threw the spotlight on non-banking financial institutions (NBFIs) and their risk to stability, the BoE noted Tuesday.
"There is a need to develop stress-testing approaches to understand better the resilience of NBFIs to shocks" and their links with commercial lenders and markets, it added in a report.
"The bank will run, for the first time, an exploratory scenario exercise focused on NBFI risks, to inform understanding of these risks and future policy approaches," it revealed.
September's turmoil, centred on the exposure of pension funds to UK debt market volatility, highlighted a "material risk" to stability, the BoE warned.
Some pension funds use Liability Driven Investments (LDIs), which are linked to financial derivatives and intended to help ensure that the income generated by the assets covers their long-term commitments.
However, the chaos caused the value of assets, notably government bonds, to tumble.
That forced pension funds to sell the bonds, known as gilts, to swiftly access liquidity, sending yields rocketing.
"The rapid and unprecedented increase in yields exposed vulnerabilities associated with LDI funds, in which many defined benefit pension schemes invest," the BoE said.
"This led to a vicious spiral of collateral calls and forced gilt sales that risked leading to further market dysfunction, creating a material risk to UK financial stability."
The BoE itself does not regulate LDIs, but wants pension fund watchdogs to ensure institutions have sufficient collateral in LDI funds to withstand further shocks.
Truss quit in October, replaced by Rishi Sunak and the new Conservative prime minister has reversed her unfunded budget that also sent the pound slumping to a record low against the dollar.
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Investment funds and other non-bank financial institutions face their first 'stress test' next year to apply lessons from the near-meltdown in Britain's pension fund sector, the Bank of England said on Tuesday.
The BoE had to step in from September to buy 19.3 billion pounds ($23.75 billion) of government bonds to stabilise markets after turmoil caused by the fiscal plans of Liz Truss's short-lived government.
Liability-driven investment (LDI) funds, used by pension funds to ensure their long-term payouts, struggled to meet collateral calls as bond prices tumbled.
The BoE's Financial Policy Committee (FPC), which monitors the financial system for risks, said on Tuesday that the LDI crisis showed the need to test how non-bank financial institutions (NBFI) cope with stresses.
"The Bank will run, for the first time, an exploratory scenario exercise focused on NBFI risks, to inform understanding of these risks and future policy approaches," the FPC said in its half-yearly Financial Stability Report.
Further details will be set out in the first half of 2023.
"There is also a need to develop stress-testing approaches to understand better the resilience of NBFIs to shocks and their interconnections with banks and core markets," the FPC said.
The test will focus on the UK government and corporate bond market and its main participants, which play a core role in financing the UK economy.
Such market-based finance accounted for 776 billion pounds, or 55%, of all lending to UK businesses at the end of 2021 and nearly all of the almost 390 billion pound net increase in lending to the sector between the end of 2007 and end of 2021.
LDI funds are often listed in Ireland and Luxembourg, where regulators - along with their UK counterparts - have introduced quick fixes that forced funds to maintain far higher levels of cash.
They can now cope with a 300 to 400 basis point move in interest rates, well above the 150 basis point level held before September's turmoil.
"Ensuring greater resilience has been a central priority for managers of LDI strategies in the aftermath of the unprecedented gilt market movements we saw in late September," said Jonathan Lipkin, director for policy, strategy and innovation at the Investment Association.
The sector plans to work with regulators "so that future stress tests are robust to a yield shock of this magnitude, and that any risk measures put in place are proportionate", he added.
NEW GUIDANCE
The FPC said it will work with counterparts in the European Union to come up with mimimum cash buffer guidance on a longer-term "steady state" basis, which could potentially push up fees to absorb the cost or make the use of LDI funds unattractive.
Britain's pensions regulator is due to update its guidance to the sector in April, which could include the new steady state cash buffer levels, data reporting and requirements for fund trustees to speed up decision-making in a crisis.
The FPC said it also backed a call from the Financial Conduct Authority to regulate consultants who advise pension funds.
After regulators introduced tougher rules for banks in the aftermath of the global financial crisis more than a decade ago, attention is turning again to non-banks, such as funds and insurers, which account for about half of the global financial system.
Regulators worry there is too little data on hidden leverage in the system, as shown by LDI.
"The episode also exposed deficiencies in how banks monitor and manage risks with respect to LDI funds," the FPC said.
The FPC said there will be a consultation paper in 2023 on likely moves to require money market funds - which struggled when economies went into COVID-19 lockdowns in March 2020 - to hold more cash.
($1 = 0.8127 pounds)
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Bank of England governor Andrew Bailey has warned Rishi Sunak’s government against going too far with its flagship programme to free the City from post-crisis regulations, cautioning that the rules were put in place for a reason and are still needed.
Bailey’s insistence on the need for continued vigilance in the financial sector came as the central bank said it would carry out the world’s first stress tests on vulnerabilities in the non-bank financial markets, after September’s implosion of UK pension funds exposed gaps in policymakers’ understanding of systemic risk in key markets.
“The notion that we’re past the financial crisis and we therefore don’t need the regulation that we had post the financial crisis, I would not go along with that,” Bailey told reporters on Tuesday, just days after Jeremy Hunt, the chancellor, unveiled the biggest shake up of UK financial regulation in decades.
“It’s . . . important to make clear, that the basis on which the regulatory [regime] was done was not done just to address a particular problem that then went away,” he said. “It was done to put down some pretty fundamental planks of the regulatory system.”
The government’s plans, dubbed the Edinburgh reforms, include relaxing the ringfencing rules around the separation of retail and investment banking, simplifying rules for parts of the investment market, and giving the UK’s top regulators — including the BoE — a mandate to boost the City’s competitiveness.
Ministers insist the reforms are not the bonfire of regulations some hoped for after Brexit. “We have to make sure we don’t unlearn the lessons of 2008 but at the same time recognise that banks today have much more balanced sheets,” Hunt told the FT’s Global Boardroom on Friday.
While acknowledging that Brexit allowed for a reset of some rules that were ill-suited to the UK, such as those on how much capital insurers must hold, Bailey defended the senior managers regime, a crisis-inspired executive accountability regime that Hunt proposes to overhaul.
“[The senior managers’ regime] moved us from a world where the judgment was one of culpability to one of responsibility. That has created a helpful dynamic,” said the governor.
The BoE paid tribute to the robust condition of banks in its Tuesday’s financial stability update, noting that both they and the UK’s corporate sectors were well positioned to withstand the country’s worsening economic outlook.
Officials noted that while UK households were being “stretched” by rising interest rates and soaring inflation, they were not yet showing “widespread signs of financial difficulties” or an inability to repay loans.
But dynamics in the non-banking financial sector were more concerning for the senior bank officials and external experts of the BoE’s Financial Policy Committee.
The FPC said international regulators needed to “urgently . . . develop and implement appropriate policy responses” to tame risk stemming from non-bank financial institutions, whose share of the global financial services market has more than doubled since the 2007-08 financial crisis.
“We’ve had a whole series of non-bank incidents across different jurisdictions and I think it is absolutely critical . . . to recognise this is a sector that is highly internationally diversified [and needs global rules],” Bailey told reporters.
In the meantime, the BoE is planning a “deep dive into specific risks” in financial markets dominated by institutions such as hedge funds, mutual funds and pension funds so that policymakers can “propose solutions”.
The tests will look at issues such as how a shock in one financial market can ripple through another, the dangers of highly concentrated risks and how behaviours evolve through a crisis, with further details to be revealed in the first half of 2023.
Those areas were noted as weak points by the BoE after September’s liability-driven investment crisis, when a surge in UK government bond yields led to a rapid sale of gilts by pension funds in the wake of then prime minister Liz Truss’s poorly received “mini” Budget.
The central bank also identified “deficiencies” in how banks, which were involved in LDI derivative trades, “monitor and manage risks”, as well as “a lack of regular and granular data”.
The BoE ultimately had to step in with an £65bn bond-buying programme to stabilise UK government bond markets.
Unlike the annual banking stress tests the BoE has been running since 2014, the non-bank institution stress tests will not publish results of individual companies or funds, or order them to take actions, such as raising capital or withholding dividends.
Jon Cunliffe, deputy governor for financial stability, said that while the BoE did not have powers to supervise some non-banks, it could request such powers at a later stage and could make “pretty strong recommendations”.
The central bank is separately calling for more stringent oversight of LDIs. On Tuesday, it asked regulators in Ireland and Luxembourg, which oversee most of the UK pension industry’s LDI funds, and The Pensions Regulator, which monitors the pension funds themselves, to set out a permanent safety net that funds should maintain to withstand shocks.
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Rising interest rates present a financial challenge for most Canadians. For the hundreds of thousands who bought pre-construction homes during the pandemic and are now seeking to finalize financing as they approach closing and occupancy, the challenge can be formidable. The federal government and the Office of the Superintendent of Financial Institutions (OSFI) can help protect new home owners and send a strong signal on housing by reconsidering or, at the very least, temporarily suspending the mortgage stress test.
The stress test or minimum qualifying rate currently requires home buyers to qualify for the greater of the mortgage contract rate plus 2 per cent or 5.25 per cent. Introduced in 2016 and expanded in 2018, the stress test was originally intended to test borrowers’ ability to continue mortgage payments in the event of changes in economic circumstances, including rising interest rates, fluctuating house prices or reductions in income. It was part of a suite of measures brought in to cool the housing market after a period of high activity in 2016-2017.
With posted five-year rates now at 5.6 per cent, home buyers must be able to qualify at 7.6 per cent, a significant challenge for those who bought new homes and condominiums at a time when interest rates were at all-time lows and who are now seeking to finalize financing during the fastest increase in rates in living memory. Many will struggle to obtain financing, and the 2 per cent additional hurdle imposed by the stress test will, in many cases, be the difference between securing the home they need and not being able to do so.
The market is also in need of a strong signal as we all wait and wonder what comes next. New projects are postponed or delayed, further constraining already limited supply. All the while, pent-up demand for new housing increases—manifesting itself in rising rents—as prospective buyers sit on the sidelines and new residents arrive at a record pace.
With most economists in agreement that rate hikes may be close to the peak and with economic storm clouds on the horizon, temporarily suspending the minimum qualifying rate might just be the signal the market needs. It costs governments nothing, yet it helps the hundreds of thousands of Canadians who bought a new home between 2020 and mid-2022 to close on their homes by removing the artificial 2 per cent hurdle. It also allows the industry to get on with planning and building the housing new and existing residents will inevitably need when the economy stabilizes.
Dave Wilkes is President and CEO of the Building Industry and Land Development Association (BILD), the voice of the home building, land development and professional renovation industry in the GTA. For the latest industry news and new home data, follow BILD on Twitter, @bildgta, or visit www.bildgta.ca.
Last week’s Bank of Canada interest rate hike has pushed the qualifying rate under Canada’s mortgage stress test to above eight per cent for many borrowers, raising questions about whether the test is too strict.
The concerns come as regulators prepare to announce a review of the stress test on Dec. 15. On Friday, the Office of the Superintendent of Financial Institutions (OSFI), Canada’s top banking regulator, poured cold water on calls to amend the formula amid soaring interest rates, which have climbed 400 basis points so far this year,
“We see great risk in speculating on the mortgage rate cycle, and we do not consider the minimum qualifying rate to be a tool to manage the demand for housing,” OSFI superintendent Peter Routledge said in a statement. “We see the minimum qualifying rate as an underwriting practice that adds an important safety buffer to residential mortgage portfolios, the largest exposure Canadian lenders have on their books.”
In 2018, the Canadian government rolled out the mortgage stress test. Since then, federally regulated lenders have been forced to ensure borrowers could still afford their payments at an interest rate two percentage points higher than the contract rate being offered.
With the big banks now offering a prime lending rate of 6.45 per cent following the latest Bank of Canada rate increase, the qualifying rate for many mortgages will exceed eight per cent.
Dan Eisner, chief executive of True North Mortgage, said that since Wednesday’s rate hike, a homebuyer must earn around $200,000 a year to afford a million-dollar home.
“A typical client has $10,000 worth of credit card debt and a car payment so you’re going to have to be making about $200,000 a year to buy that home with a 20 per cent down payment … given that you have some other debt,” Eisner said in an interview.
Average home prices in Toronto and Vancouver both exceed the million dollar threshold, while the national average home price stood at $644,643 in October, according to the Canadian Real Estate Association.
While OSFI put the emphasis on protecting lending portfolios, the stress test does so by giving borrowers a buffer in the event interest rates rise or their personal financial situation changes, such as through job loss or a drop in income. It also ensures borrowers have some protection against other changes in the economy, such as recessions or the climbing cost of living. Currently, all of those issues are at play.
Even before Routledge’s statement was released on Friday, most mortgage industry professionals suspected that OSFI planned to leave things as they are when it announces its review this week.
“I would say that the stress test is proving its value,” Robert Hogue, assistant chief economist at the Royal Bank of Canada said in an interview last week. “It was largely designed to protect against what we’ve experienced since March — a sharp rise in interest rates — and to ensure that the vast majority of borrowers are able to manage the increase and not get in trouble. This is a very important safeguard tool that is in the policymakers’ toolbox.”
While Hogue said a case could be made to soften the buffer as the odds that rates rise by another two percentage points have diminished, he said there is still too much uncertainty about the path of the economy.
“I suspect that OSFI is going to leave things as they are,” he said.
Bank of Montreal economist Robert Kavcic said he sympathizes with borrowers.
“Fundamentally, the issue here is that the stress test was really designed to operate in an extraordinarily low interest rate environment, under the assumption that that period was not normal,” Kavcic said in an interview. “Now that we’ve gotten back to a period that’s more normal, I can sympathize with the question out there, ‘Do we still need to qualify people 200 basis points above rates that are on the ground today?’ ”
Although Kavcic sees areas for improvement when it comes to the MQR, he thinks it may not be the right time for OSFI to make changes.
“On the other side of it, is now really the best time to make changes as we potentially go into an economic slowdown?” Kavcic said. “Maybe rates are peaking, but we also could be facing an income shock over the next year or so if the economy goes into a recession.”
Karen Yolevski, chief operating officer of Royal LePage Real Estate Services Ltd. doesn’t believe that OSFI will make any changes to the MQR simply because regulators strongly believe in the purpose of the test which is to ensure that borrowers can keep up with their mortgages.
“The purpose of the test has been well established since its initiation and I don’t think that that reasoning has changed for regulators,” Yolevski said in an interview. “So for that reason, I don’t think that they’ll make a change now.”
• Email: shcampbell@postmedia.com
A handful of government-backed financial institutions have been exploring tokenization use cases to revolutionize traditional financial systems. For instance, El Salvador’s Bitcoin Volcanic bond project has been in the works for over a year and aims to raise $1 billion from investors with tokenized bonds to build a Bitcoin city.
The Central Bank of Russia has also expressed interest in tokenized off-chain assets. In addition, the Israeli Ministry of Finance, together with the Tel Aviv Stock Exchange (TASE), recently announced the testing of a blockchain-backed platform for digital bond trading.
Cointelegraph Research’s 2021 Security Token Report found that most securities will be tokenized by 2030. While notable, the potential behind tokenized government bonds appears to be massive, as these assets can speed up settlement time while freeing up liquidity within traditional financial systems.
Brian Estes, CEO of Off the Chain Capital and a member of the Chamber of Digital Commerce, told Cointelegraph that tokenizing a bond allows for faster settlement, which leads to reduced costs.
“The time of ‘capital at risk’ becomes reduced. This capital can then be freed up and used for higher productive use,” he said. Factors such as these have become especially important as inflation levels rise, impacting liquidity levels within traditional financial systems across the globe.
Touching on this point, Yael Tamar, CEO and co-founder of SolidBlock — a platform enabling asset-backed tokenization — told Cointelegraph that tokenization increases liquidity by transferring the economic value of a real-world asset to tokens that can be exchanged for cash when liquidity is needed.
“Because tokens communicate with financial platforms via a blockchain infrastructure, it becomes easier and cheaper to aggregate them into structured products. As a result, the whole system becomes more efficient,” she said.
To put this in perspective, Orly Grinfeld, executive vice president and head of clearing at TASE, told Cointelegraph that TASE is conducting a proof-of-concept with Israel’s Ministry of Finance to demonstrate atomic settlement, or the instant exchange of assets.
In order to demonstrate this, Grinfeld explained that TASE is using the VMware Blockchain for the Ethereum network as the foundation for its beta digital exchange platform. She added that TASE will use a payment token backed by the Israeli shekel at a one-to-one ratio to conduct transactions across the blockchain network.
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In addition, she noted that Israel’s Ministry of Finance will issue a real series of Israeli government bonds as tokenized assets. A live test will then be performed during the first quarter of 2023 to demonstrate atomic settlements of tokenized bonds. Grinfeld said:
“Everything will look real during TASE’s test with the Israel’s Ministry of Finance. The auction will be performed through Bloomberg’s Bond Auction system and the payment token will be used to settle transactions on the VMware Blockchain for Ethereum network.”
If the test goes as planned, Grinfeld expects settlement time for digital bond trading to occur the same day trades are executed. “Transactions made on day T (trade day) will settle on day T instead of T+2 (trade date plus two days), saving the need for collateral,” she said. Such a concept would therefore demonstrate the real-world value add that blockchain technology could bring to traditional financial systems.
Tamar further explained that the process of listing bonds and making them available to institutions or the public is very complex and involves many intermediaries.
“First the loan instruments need to be created by a financial institution working with the borrower (in this case, the government), which will be processing the loans, receiving the funds, channeling them to the borrower and paying the interest to the lender. The bond processing company is also in charge of accounting and reporting as well as risk management,” she said.
Echoing Grinfeld, Tamar noted that settlement time can take days, stating that bonds are structured into large portfolios and then transferred between various banks and institutions as a part of a settlement between them.
Given these complexities, Tamar believes that it’s logical to issue tokenized government bonds across a blockchain platform. In fact, findings from a study conducted by the crypto asset management platform Finoa and Cashlink show that tokenized assets, such as government bonds, could result in 35%–65% cost-savings across the entire financial system value chain.
From a broader perspective, Perianne Boring, founder and CEO of the Chamber of Digital Commerce, told Cointelegraph that tokenized bonds also highlight how technology-driven innovations in financial instruments can provide investors with alternative financial products.
“Generally, such bonds would come with reduced costs and more efficient issuance, and come with a level of transparency and monitoring capabilities that should appeal to investors who want greater control over their assets,” she said.
Features such as these were recently demonstrated on Nov. 23, when Singapore’s DBS Bank announced it had used JPMorgan’s blockchain-based trading network Onyx to execute its first tokenized intraday repurchase transaction.
Banks use repurchase agreements — also known as repos — for short-term funding by selling securities and agreeing to repurchase them later. Settlement usually takes two days, but tokenizing these assets speeds this process up. A DBS spokesperson told Cointelegraph that the immediate benefits of tokenized bonds or securities result in an improvement in operational efficiency, enabling true delivery vs. payment and streamlined processes with golden copies of records.
While tokenized bonds have the potential to revolutionize traditional financial systems, a number of challenges may slow adoption. For example, Grinfeld noted that while Israel’s Ministry of Finance has expressed enthusiasm in regards to tokenization, regulations remain a concern. She said:
“To create new ways of trading, clearing and settlement using digital assets, a regulatory framework is needed. But regulations are behind market developments, so this must be accelerated.”
A lack of regulatory clarity may indeed be the reason why there are still very few regions exploring tokenized government bonds.
Varun Paul, director of central bank digital currencies (CBDCs) and financial market infrastructure at Fireblocks, told Cointelegraph that while many market infrastructure providers are exploring tokenization projects behind the scenes, they are waiting on clear regulations before publicizing their efforts and launching products into the market.
Fireblocks is currently working with TASE and Israel’s Ministry of Finance to provide secure e-wallets for the proof of concept, which will enable the participating banks to receive tokenized government bonds.
In addition to regulatory challenges, large financial institutions may find it difficult to grasp the technical implications of incorporating a blockchain network. Joshua Lory, senior director of Blockchain To Go Market at VMWare, told Cointelegraph that market education across all ecosystem participants will accelerate the adoption of the technology.
Yet, Lory remains optimistic, noting that VMware Blockchain for Ethereum’s beta was announced in August of this year and already has over 140 customers requesting trials. While notable, Estes pointed out that blockchain service providers must also take into account other potential challenges such as back-end programming for brokerage firms to make sure they are equipped to report bonds accurately on their statements.
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All things considered though, Estes believes that the tokenization of multiple assets is the future. “Not only bonds, but stocks, real estate, fine art and other stores of value,” he said. This may very well be the case, as Grinfeld shared that following the proof-of-concept, TASE plans to expand its range of tokenized asset offerings to include things such as CBDCs and stablecoins.
“This POC will lead us toward a complete future digital exchange based on blockchain technology, tokenized assets, e-wallets and smart contracts,” she said. Adoption will likely take time, but Paul mentioned that Fireblocks is aware that financial market participants are interested in taking part in replicating TASE’s model in other jurisdictions:
“We anticipate that we will see more of these pilots launching in 2023.”
The Relist Watch column examines cert petitions that the Supreme Court has “relisted” for its upcoming conference. A short explanation of relists is available here.
After a few slow weeks on the relist front, the Supreme Court came roaring back this week with four newly relisted petitions that, if granted, will likely be added to the March 2023 argument calendar.
Two years ago, in United States v. Sineneng-Smith, the Supreme Court reversed a circuit-court decision that struck down a federal law criminalizing the act of “encourag[ing] or induc[ing]” noncitizens to enter or remain in the United States for financial gain. In what would be Justice Ruth Bader Ginsburg’s penultimate majority opinion, the court unanimously reversed, on the grounds that the decision of the U.S. Court of Appeals for the 9th Circuit was a “drastic departure from the principle of party presentation” that “constituted an abuse of discretion.” Basically, while the defendant’s own counsel had challenged her criminal conviction by arguing that the statute was unconstitutionally vague and that her own prosecution had violated the First Amendment, the 9th Circuit panel had appointed amici to raise a broader theory that the law was unconstitutionally overbroad and invalid in all applications. By reversing on the grounds of the appellate court’s procedural overreach, the Supreme Court dodged the substantive question of whether the law is unconstitutionally overbroad.
Our first new relist this week, United States v. Hansen, squarely raises that First Amendment challenge. Helaman Hansen ran an immigration-advising service. Hansen charged undocumented immigrants to advise them on what he claimed was a pathway to U.S. citizenship through adult adoption. The only catch? Hansen’s method was not actually a valid means to obtain citizenship. A federal court in California convicted Hansen of multiple counts of fraud, as well as convincing customers to overstay their visas and participate in his adoption program in violation of the encourage-or-induce statute.
Hansen appealed to the 9th Circuit. While Hansen’s case was pending, the 9th Circuit issued its soon-to-be-reversed ruling in Sineneng-Smith holding the statute unconstitutionally overbroad because it penalizes general, benign immigration advocacy. In response, Hansen raised the First Amendment overbreadth issue in his own appeal. The 9th Circuit placed Hansen’s case on hold while the Supreme Court considered its Sineneng-Smith ruling. After the justices reversed that ruling on procedural issues not present in Hansen’s case, the court of appeals resumed Hansen’s appeal and reaffirmed its previous conclusion in Sineneg-Smith, again striking down the statute as overbroad and reversing Hansen’s convictions under it.
The government again seeks review of the 9th Circuit’s holding. The government argues that the terms “encourage” and “induce” have a long history of specific association with aiding and abetting criminal conduct. Criminalizing the encouragement or inducement of immigration violations for financial gain, the government maintains, is perfectly consistent with the general principle that the First Amendment does not protect speech that is intended to instigate illegal activity. Hansen argues that there’s no split on the issue and the case is a poor vehicle because the jury that convicted Hansen wasn’t presented with the theory the government currently is advocating. This case strikes me as a very likely grant.
Next up is Polselli v. Internal Revenue Service. A provision of the Internal Revenue Code generally requires the IRS, when it serves a summons for records about a taxpayer on a third-party recordkeeper (like a bank, accountant, or lawyer) to give that person notice of the summons. The same provision provides that “any person who is entitled to notice of a summons … shall have the right to begin a proceeding to quash” that summons in district court. There are a few exceptions to the notice requirement. As relevant here, the IRS need not provide notice of “any summons … issued in aid of the collection of (i) an assessment made or judgment rendered against the person with respect to whose liability the summons is issued; or (ii) the liability at law or in equity of any transferee or fiduciary of any person referred to in clause (i).” Where notice is not required, the authorization to initiate a proceeding to quash a summons is also inapplicable.
The IRS summonsed the bank records of two law firms that represent delinquent taxpayer Remo Polselli and his wife, Hanna Karcho Polselli, on the theory that the records might reveal how Remo paid the firms. The law firms’ bank records also reveal information about the firms’ other clients, such as Hanna. The banks informed Hanna and the law firms, which sought to quash the summonses. The district court granted the government’s motion to dismiss the action, holding that they fell within the notice exception and thus were powerless to quash. A divided panel of the U.S. Court of Appeals for the 6th Circuit affirmed, following similar precedent of the U.S. Court of Appeals for the 7th Circuit. Judge Raymond Kethledge dissented, saying that he would have construed the notice exception “more narrowly than it would ordinarily be read” as limited to records the delinquent taxpayer owned or had a legal interest in, consistent with an opinion of the 9th Circuit. Hanna and the law firms seek review, asserting a 2-1 split. The government contends that, in a more accurate opinion, the 9th Circuit “has clarified the limited effects of” the decades-old case the petitioners rely on, and it argues that the plain language of the statute bars the suit.
Next up is Lora v. United States, presenting an issue of federal criminal sentencing. District courts have discretion to impose either consecutive or concurrent sentences unless a statute mandates otherwise. Section 924(c)(1)(D)(ii) of Title 18, which imposes penalties for using or carrying a firearm during and in relation to a crime of violence or drug-trafficking crime, specifies that sentences imposed “under this subsection” must run consecutive to other sentences. Efrain Lora was convicted and sentenced for a drug-trafficking-related murder under a different subsection, Section 924(j). Lora therefore argued that the district court had discretion to impose concurrent sentences because Section 924(j) creates an offense distinct from Section 924(c)(1)(D)(ii). But the U.S. Court of Appeals for the 2nd Circuit ruled that the district court was required to impose consecutive sentences because it concluded that Section 924(j) is essentially an aggravated form of the Section 924(c) offense.
Lora argues that four circuit courts have reached the same conclusion as the 2nd Circuit, and at least two circuits have disagreed. The government acknowledges what it calls a “narrow conflict in the circuits as to whether [Section] 924(c)’s consecutive-sentence mandate applies to a conviction for the greater-included offense under [Section] 924(j).” But it argues that the issue “has limited practical importance” and notes that the Supreme Court has repeatedly denied cert on the issue.
Lastly, we have Coinbase, Inc. v. Bielski. Under Section 16(a) of the Federal Arbitration Act, an interlocutory appeal “may be taken from an order … denying an application … to compel arbitration.” The Supreme Court held in Griggs v. Provident Consumer Disc. Co. that an appeal “divests the district court of its control over those aspects of the case involved in the appeal.” Coinbase, a cryptocurrency exchange, contends that six circuits have held that a non-frivolous appeal of the denial of a motion to compel arbitration divests the district court of jurisdiction over a case, thereby automatically staying proceedings in the district court. But it contends that three circuits have held that such an appeal does not divest the district court of jurisdiction over the underlying litigation, and the appealing party must obtain a stay pending appeal pursuant to the traditional discretionary test or else face ongoing district court litigation pending appeal.
The joint petition involves two underlying disputes, involving separate putative class actions brought by users of Coinbase. When they sued, Coinbase sought to compel arbitration under a clause in the standard user agreement, and the district court refused to compel arbitration. While those appeals are pending, Coinbase sought to stay district court proceedings, the district courts refused, and then the 9th Circuit also refused to stay district court proceedings. Coinbase sought an emergency stay (and requested expedition) from the Supreme Court, which denied the request. Later, the district court in one of the two underlying actions stayed the case pending appeal as a matter of its discretion. One of the two respondents argues that the granting of a discretionary stay underscores the case’s lack of importance. We’ll find out soon what the Supreme Court thinks.
Polselli v. Internal Revenue Service, 21-1599
Issue: Whether the exception in I.R.C. § 7609(c)(2)(D)(i) to the notice requirements for an Internal Revenue Service summons on third-party recordkeepers applies only when the delinquent taxpayer owns or has a legal interest in the summonsed records, as the U.S. Court of Appeals for the 9th Circuit has held, or whether the exception applies to a summons for anyone’s records whenever the IRS thinks that person’s records might somehow help it collect a delinquent taxpayer’s liability, as the U.S. Courts of Appeals for the 6th and 7th Circuits have held.
(relisted after the Dec. 2 conference)
Lora v. United States, 22-49
Issue: Whether 18 U.S.C. § 924(c)(1)(D)(ii), which provides that “no term of imprisonment imposed … under this subsection shall run concurrently with any other term of imprisonment,” is triggered when a defendant is convicted and sentenced under 18 U.S.C. § 924(j).
(relisted after the Dec. 2 conference)
Coinbase, Inc. v. Bielski, 22-105
Issue: Whether a non-frivolous appeal of the denial of a motion to compel arbitration ousts a district court’s jurisdiction to proceed with litigation pending appeal.
(relisted after the Dec. 2 conference)
United States v. Hansen, 22-179
Issue: Whether the federal criminal prohibition against encouraging or inducing unlawful immigration for commercial advantage or private financial gain, in violation of 8 U.S.C. § 1324(a)(1)(A)(iv) and (B)(i), is facially unconstitutional on First Amendment overbreadth grounds.
(relisted after the Dec. 2 conference)
Escobar v. Texas, 21-1601
Disclosure: Goldstein & Russell, P.C., whose attorneys contribute to SCOTUSblog in various capacities, is among the counsel to petitioner in this case.
Issue: Whether the Texas Court of Criminal Appeals erred in holding that the prosecution’s reliance on admittedly false DNA evidence to secure petitioner’s conviction and death sentence is consistent with the due process clause of the 5th Amendment because there is no reasonable likelihood that the false DNA evidence could have affected the judgment of the jury.
(relisted after the Nov. 4, Nov. 10, Nov. 18 and Dec. 2 conferences)
Counterman v. Colorado, 22-138
Issue: Whether, to establish that a statement is a “true threat” unprotected by the First Amendment, the government must show that the speaker subjectively knew or intended the threatening nature of the statement, or whether it is enough to show that an objective “reasonable person” would regard the statement as a threat of violence.
(relisted after the Nov. 18 and Dec. 2 conferences)
Recommended Citation: John Elwood, Federal ban on inducing unlawful immigration for financial gain may get another Supreme Court test, SCOTUSblog (Dec. 7, 2022, 3:58 PM), https://www.scotusblog.com/2022/12/federal-ban-on-inducing-unlawful-immigration-for-financial-gain-may-get-another-supreme-court-test/
An early dismissal process of cases judged to be strategic litigation against public participation (SLAPPs) will be introduced into statute in a bid to cut short and reduce costs of cases which have no merit to continue, the government revealed today. Junior justice minister Mike Freer MP made the announcement during his closing remarks at a two-day conference organised by the anti-SLAPP coalition of media and free speech groups.
Freer told the conference: ‘The UK aims to introduce comprehensive and targeted anti-SLAPP legislation. The government ran a public call for evidence on SLAPPs in March this year, just three weeks after the Russian invasion of Ukraine started. This helped us to get a grip on the scale of the issue.
‘Some of what it uncovered was nothing short of harrowing, laying bare the financial and psychological impact that extensive litigation has on SLAPPs defendants.
‘We intend to turn our planned reforms into reality as soon as parliamentary time allows. Bear with us and we will get around to it but I wanted to go a little bit further, the commitment is absolutely solid.
‘We know that defendants are intimidated by the prospect of years of expensive litigation, indeed, we’ve heard poignant testimonies about this throughout the course of the conference.
‘So, to give our courts more powers to stop this, we plan to introduce an early dismissal process in statute, which will effectively stop claimants from financially and psychologically exhausting their opponents, cutting short cases which have no merit with the use of a three-part test.’
The three-part test, Freer said, would be for the complained-of article to be in the public interest, that the case lacks sufficient evidence of merit to proceed and has some features of abuse of process. Features of process abuse will be set out in a ‘non-exhaustive’ list of factors that are common hallmarks of SLAPPs litigation.
The announcement follows yesterdays’s SRA warning notice in relation to SLAPP cases and how solicitors should be ‘guarded’ against becoming involved in potentially abusive litigation.
As well as early dismissal, a costs protection scheme will also be introduced to allow SLAPP defendants to litigate against any claims, the minister said. He added: ‘This scheme will be introduced in secondary legislation, once the essential identifying features are set out in statute.’
The SRA is currently investigating 29 firms suspected of SLAPP activity. The regulator 'should be applauded' for its action on SLAPPs, Freer said.
Describing the legal sector as 'one of our greatest exports', he said 'it would be a pity if that reputation were to be damaged by a few bad apples.
‘The SRA’s decisive action supports the wider cultural shift in the UK away from tolerating activity that tarnishes the integrity of our judicial and legal profession.’
He added: 'The messages you have sent today have been heard in government and we will be acting.'