Posted December 10, 2015

Federal Reserve Vice Chair Fischer delivered remarks at the “Financial Stability: Policy Analysis and Data Needs” 2015 Stability Conference sponsored by the Federal Reserve Bank of Cleveland and the Office of Financial Research. Here is discussed financial stability and shadow banking.

Vice Chair Fischer believes that there are “five factors that contribute to financial fragility”: (a) high debt burdens at households and firms; (b) elevated leverage and maturity transformation within the financial sector; (c) complexity and interconnectedness in intermediation chains; (d) low risk premiums on assets, especially assets funded with debt; and (e) complacency on the part of investors, supervisors and decision-makers in the private sector of the financial system.

During Vice Chair Fischer’s presentation he offered an assessment of vulnerabilities in the financial system; and identified gaps in the current understanding of conditions inside and outside of the banking sector that should be addressed by regulators and researchers.

He stated, “An essential element of [the federal regulatory] infrastructure is learning the lessons of history – both the lessons of what happened, and the fact that supervisors and regulators will on occasion be surprised”.

Mr. Fischer made the following assertions regarding what needs to be understood to monitor financial stability:

• A Closer Look at Shadow Banking: The reduction in leverage and maturity transformation associated with better regulations leaves the financial system “much more resilient – even if such regulations have modestly affected market liquidity.”

• What We Know and What We Do Not: Data on a range of activities – including securities lending, bilateral repos, and derivatives trading – that create funding and leverage risks “remain inadequate and hence could prove destabilizing if sufficiently large or widespread.”

• Data Are Not Enough: We Need Theory Too: An “important area in need of development” is economic modeling on interconnectedness, particularly on the interaction of shadow banking, banks and the broader financial system. Further, research that distinguishes between banks and nonbanks, or highlights how their interactions are driven by economic incentives, could guide regulator efforts to collect data and set policies to limit possible instabilities associated with interconnectedness.

Though Vice Chair Fischer made no mention of the alternative investment landscape of P2P Lending, it will be interested to see where Peer -to- Peer Lending Marketplaces will be placed as related to shadow banking as a contributor to financial stability in the coming years.

As of December 9, 2015, FINRA extended the review period for its proposed funding portal rules to January 26, 2016. The new rules were promulgated pursuant to the Jumpstart Our Business Startups Act 2012 (JOBS Act) which “prohibits funding portals from a variety of activities, including offering investment advice or recommendations, soliciting transactions for securities displayed on their websites, compensating employees for securities solicitations, and holding investor funds or securities.” The proposed rules under review are (i) funding portal rules 100, 110, 200, 300, 800, 900 and 1200; (ii) related forms; and (iii) FINRA Rule 4518 (“Notification to FINRA in Connection with the JOBS Act”).

See: FINRA’s Extension of SEC Review Period.

October 28, 2015, posted by Kim Wales

Three years after the Securities and Exchange Commission released proposed rules for Title III, Regulation Crowdfunding, news was released yesterday that the Commission will take a vote on whether or not to release the final rules for Title III on Friday, October 30, 2015.

Given the challenges with the 653 pages of proposed final rules, I am hopeful that commission took into account the 300+ recommendation letters, numerous meetings and sideline protest that would amend the final rules into a usable form.

There were many changes requested but the top 3 included:

1. Increasing the maximum raise from $1 million to $5 million during a 12 month period.
2. Raise the cap from $500k to $750k before requiring the issuer to provide audited financial statements and to remove the yearly mandate.
3. Remove the Liability on funding platforms, see page 280.

The meeting at the SEC is open to the public. It is scheduled to take pace at 10:00 AM in the Auditorium Room (L-002). The proceedings are expected to be live-streamed on the SEC web site.

The SEC outlined the meeting:

1. The Commission will consider whether to adopt rules and forms related to the offer and sale of securities through crowdfunding under Section 4(a)(6) of the Securities Act of 1933, as mandated by Title III of the Jumpstart Our Business Startups Act.
2. The Commission will consider whether to propose amendments to Securities Act Rule 147 and Rule 504.

October 28, 2015, posted by Kim Wales

Christine Farnish, Chair of the Peer-to-Peer Finance Association (P2PFA) announced new operating principles that will enhance risk management and promote transparency for the sector.

Over the last 12 months, data collected by P2P FA showed that almost £2bn worth of new lending in the EU P2P industry  from consumers, small businesses and property lending almost doubling.

The new guidelines require P2P association members to publish debt data to a common standard, make their loan books transparent and ensure that retail investors are competing on the same level playing field as institutional investors.

“Our new operating principles set a benchmark of fair dealing and transparency,” said Christine Farnish, Chair of the P2PFA.  “By the New Year, all our members will publish their full loan books, show bad debt losses in a comparable way, and commit to ensuring that retail investors get a fair deal compared with institutions.

“These new measures will help build further consumer confidence, demonstrate our commitment to ethical practice and set a beacon of good practice across the market.”

You can see a copy of the new guidelines here:

CrowdFundInsider spotlighted the rising popularity of SME Bonds in a July 10^th article authored by JD Alois. The article included commentary from Anthony Puls, Founding Director & Chairman of ASSOB and one of the trailblazers in the investment crowdfunding space. SME Bond are already available in Australia and New Zealand and target startups and early stage companies seeking to raise capital through crowdfunding. Puls expects SME Bonds to be available in the United States and Canada soon.

According to Puls, ““Entrepreneurs often require some initial seed funding to cover consultant’s fees; investment offer documentation; promotional videos; crowdfunding platform listing fees, etc. This is where the SME bond fits in.”

As outlined in the article, SME bonds have several advantages:

• As a debt/equity hybrid, SME bonds are a cost-effective method to raise capital of up to $150,000. The bond is a debt interest that may include an interest rate but instead of paying cash – it delivers equity to the investor once it is “converted”.

• An SME bond is a private treaty between an entrepreneur with an early-stage business and an early supporter who wants to back that entrepreneur. It can also be suitable for an investor that finds an entrepreneur with a great idea or business opportunity. It’s a one-on-one transaction.

• An SME bond starts off as a loan/debt and is only converted when the issuing company undertakes a share (stock) issue.

“SMEs have witnessed traditional sources of funding dry up since the 2007–2013 financial crisis and are seeking financing through alternative methods such as peer-to-peer loans, securities based crowdfunding, Enterprise Investment Schemes and mini-bonds.  The capital market needs initiatives such as SME Bonds to provide leverage to the stifled economy,” said Ms. Wales.

Click here to read the full article.