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Head of Boston Fed Calls for Broker-Dealer Review

In a speech last week, Eric Rosengren, the Chief of the Federal Reserve Bank of Boston, called for a re-examination of broker-dealer regulation. According to Rosengren, broker-dealers were a central issue in the financial crisis, yet not enough remedial action has been taken. Rosengren believes that broker-dealers remain a high run risk based on overreliance on repurchase agreements. Though capital levels have improved, use of repurchase agreements as a funding source remains consistent with pre-crisis levels. To resolve this risk, Rosengren called for increased capital levels for entities dependent on “unstable funding” and limits on the ability of broker-dealers to finance long-term or high-credit-risk assets with repurchase agreements. According to Rosengren, the hit to broker-dealer profitability “may be unavoidable and in the public interest from a financial stability perspective.”

To further reduce broker-dealer run risk brought about by the hesitancy of creditors to accept certain collateral when broker-dealers defaulting during the crisis, Rosengren suggested restricting money market funds from holding repurchase agreements where the securing collateral is an asset that the fund would not otherwise be permitted to purchase. Rosengren also commented on the SEC’s recently money market fund reform actions, lauding the SEC for imposing a floating Net Asset Value, but questioning the utility of redemption gates and liquidity fees.