THE BIG PICTURE

The U.S., Canada and Mexico struck a deal on a new trade agreement to supplant NAFTA. The new agreement, dubbed the United States-Mexico-Canada Agreement, or "USMCA," largely builds on NAFTA's foundations, while also making significant changes on labor and environmental standards, intellectual property protections, and country of origin rules for car manufacturing. President Trump, Canadian Prime Minister Justin Trudeau, and Mexican President Enrique Pena Nieto still need to sign the agreement, and the deal must be ratified by the legislatures of the three countries.

On Thursday, the White House, after reviewing interview reports from the FBI's probe into Supreme Court nominee Brett Kavanaugh, said that it found no corroboration of the allegations of sexual misconduct alleged against the federal judge. According to a White House official, Vice President Mike Pence will be in Washington Saturday, making him available to cast a potential tie-breaking vote on Brett Kavanaugh's nomination.

On Friday, two undecided senators, Senator Susan Collins, Republican of Maine, and Joe Manchin III, Democrat of West Virginia, announced on that they would vote for the Supreme Court nominee Brett Kavanaugh. The votes of the senators are crucial because Republicans control the Senate by a 51-49 margin and can afford only one defection.

On Saturday, Judge Brett Kavanaugh was confirmed to the Supreme Court with a Senate vote of 50-48 that was largely divided along party lines, ending weeks' of confirmation fights and potentially indicating a rightward shift in the highest court. Republican Sen. Steve Daines of Montana was absent because of his daughter's wedding. Republican Sen. Lisa Murkowski of Alaska, who on Friday voted against advancing Kavanaugh's nomination, voted "present."

Other highlights of last week include:

  • Alarms were raised on Monday when two letters addressed to Defense Secretary Jim Mattis and to Navy Admiral John Richardson were intercepted at the Pentagon during routine screening for a "suspicious substance" suspected to be ricin—later revealed to be castor beans, from which ricin is derived. Another letter sent to the White House was intercepted by the Secret Service. On Wednesday, Navy veteran suspected of sending the envelopes was arrested in Utah.
  • It was announced that Secretary of State Mike Pompeo will meet with North Korean Leader Kim Jong Un next week during his trip to Asia.
  • Trump economic adviser Lawrence Kudlow said Thursday that the president is not trying to apply political pressure on the Federal Reserve or on chairman Jerome Powell with respect to interest rate matters. Mr. Kudlow said the president has his opinions about interest rates, but is not trying to impose them on central bank officials. "The Federal Reserve is independent," Mr. Kudlow said.
  • The SEC has proposed a two-year pilot program that exchanges say would undermine a widely used pricing system in which exchanges pay rebates to attract orders and charge fees to other traders.
  • The Commodity Futures Trading Commission reported a significant increase in enforcement actions and fines in fiscal 2018—buoyed by cryptocurrency cases, spoofing schemes and settlements dating back to the financial crisis.
  • The U.S. economy is experiencing "a remarkably positive set of economic circumstances," Federal Reserve Chairman Jerome Powell said Wednesday.
  • The Federal Reserve is reviewing whether to update its payments infrastructure to speed up the processing of trillions of dollars for consumers and businesses.
  • Cleveland Fed President Loretta Mester said Wednesday the financial system has been made stronger by regulatory changes in the wake of the financial crisis, and warned against rolling back the regulatory landscape too aggressively.
  • Philadelphia Fed President Patrick Harker highlighted the strength of the job market Wednesday, saying that "we have a labor market with very little slack left."
  • Unemployment fell to 3.7 percent in September, down from 3.9 percent in August, representing the lowest level in nearly half a century even as job growth slowed.

LAST WEEK ON THE HILL

HOUSE FINANCIAL SERVICES COMMITTEE

No hearings held during the recess period.

SENATE BANKING COMMITTEE

Hearing entitled "Implementation of the Economic Growth, Regulatory Relief, and Consumer Protection Act": On Tuesday, the full Committee met to hear from four agencies responsible for the supervision and regulation of banks and credit unions on their efforts, activities, objectives and plans to implement S.2155, the Economic Growth, Regulatory Relief and Consumer Protection Act. Committee Chairman Mike Crapo (R-ID) urged the regulators to submit policy documents to Congress, so that they can engage in oversight per the Congressional Review Act. FDIC Chairman Jelena McWilliams told the Committee that she hopes to release a rule establishing a leverage ratio requirement for community banks "before year end if not much sooner." The Fed's regulatory chief Randal Quarles told the Committee that the Fed will "inevitably" look at the GSIB surcharge, saying it "is part of a complex of regulations that apply to our largest firms and really needs to be considered as part of that." Ranking Member Sherrod Brown (D-OH) struck a more critical tone in his remarks, describing S.2155 as "littered with concessions to the biggest banks and offers virtually nothing for American consumers."

  • The Honorable Joseph M. Otting, Comptroller, Office of the Comptroller of the Currency
  • The Honorable Randal K. Quarles, Vice Chairman for Supervision, Board of Governors of the Federal Reserve System
  • The Honorable Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation
  • The Honorable J. Mark McWatters, Chairman, National Credit Union Administration

LEGISLATION INTRODUCED AND PROPOSED

H.R. 6972: On Tuesday, Rep. Maxine Waters (D-CA), Ranking Member of the House Committee on Financial Services, introduced H.R. 6972, the "Consumers First Act," which she describes as intended to" reverse the harmful changes the Trump Administration has imposed on the CFPB by restoring the agency's supervisory and enforcement powers and increasing the transparency and accountability needed for the agency to carry out its important mission."

THIS WEEK ON THE HILL

Thursday, October 11

Senate Banking Committee Hearing on "Exploring the Cryptocurrency and Blockchain Ecosystem": 10:00 AM in Dirksen Senate Office Building 538.

THE REGULATORS

CFTC Chairman Giancarlo Releases Cross-Border White Paper: Commodity Futures Trading Commission Chairman Giancarlo released a white paper titled "Cross-Border Swaps Regulation Version 2.0: A Risk-Based Approach with Deference to Comparable Non-U.S. Regulation." Based on the principles set forth in this white paper, Chairman Giancarlo intends to direct the CFTC staff to put forth new rule proposals to address a range of cross-border issues in swaps reform. The white paper recommends improvements to the CFTC's cross-border approach that are supportive of the G20 swaps reforms and aligned to Congressional intent, and that better balance systemic risk mitigation with healthy swaps market activity in support of broad-based economic growth.

CFTC Announces the Establishment of New Subcommittee of the Market Risk Advisory Committee and Seeks Nominations for Membership: Commodity Futures Trading Commission Commissioner Rostin Behnam announced on Wednesday that the Commission had voted to establish the Interest Rate Benchmark Reform Subcommittee under the CFTC's Market Risk Advisory Committee (MRAC). In a statement, Commissioner Behnam said "I am excited to lead this important next step by convening market experts from all disciplines to assist the MRAC, and ultimately the Commission, to find regulatory solutions, within the jurisdiction of the CFTC that will ensure a smooth transition to an alternative risk-free reference rate."

CFTC Commissioner Rebuts Critics Regarding Enforcement Penalties: Speaking to the Economic Club of Minnesota, CFTC Chairman Chris Giancarlo disclosed that in the last year the Commission has filed 83 enforcement actions and collected US$800M in enforcement penalties, significantly more than the US$265M collected in 2017, and US$484M collected in 2016. "Some have asserted that regulatory agencies under this administration have gone soft on regulatory enforcement," Giancarlo said. "By any measure, enforcement during this past year has been among the most vigorous in the history of the CFTC."

CFTC Chairman Discusses Brexit Preparations: Speaking at a Securities Industry and Financial Markets Association (SIFMA) conference in Washington, CFTC Chairman Giancarlo noted that in anticipation of the United Kingdom's exit from the European Union, the agency has formed a "Brexit task force." He expressed his view that "it is going to be a rocky time," adding that "we have no choice to assume the worst. We have to assume a hard Brexit."

CFPB Union Leader and Senate Dems Call for Firing of Associate Director Over Offensive Posts: In a letter to Acting Director Mick Mulvaney, National Treasury Employees Union President Tony Reardon urged the firing of Eric Blankenstein, an associate director at the Bureau who has come under fire for recently unearthed racially offensive blog posts. In his letter, Mr. Reardon argued that "someone with a history of racially derogatory and offensive comments has a leadership position at CFPB reflects poorly on CFPB management and your commitment to fulfilling the mandate of the agency to ensure that discriminatory and predatory lending practices are stopped." Mr. Blankenstein however, while expressing regret for what he described as "poor conduct" said in a statement that he is committed to remaining in his job and "carrying out the bureau's fair lending mandate." Later in the week, 13 Senate Democrats, led by Sherrod Brown (D-OH) also sent a letter to the Acting Director, criticizing him for hiring Mr. Blankenstein, questioning "whether his appointment is due to a failure to investigate Mr. Blankenstein's background prior to his appointment, Mr. Blankenstein withholding information from you and the CFPB, or an informed decision on your part to ignore his public comments."

Fed Chair Discusses Interest Rates: Speaking at the Atlantic Festival, Fed Chairman Jerome Powell indicated that in the future the bank could raise interest rates beyond a "neutral" level, but noted that "Interest rates have just now in real terms moved above zero, so interest rates," adding "we're a long way from neutral at this point."

Federal Reserve Seeks Comment on Potential Actions to Facilitate Real-Time Interbank Settlement of Faster Payments: On Wednesday, the Federal Reserve Board invited public comment on actions the Federal Reserve could take to support faster payments in the United States. The potential actions, which would facilitate real-time interbank settlement of faster payments, build on collaborative work with the payment industry through the Federal Reserve System's Strategies for Improving the U.S. Payment System (SIPS) initiative. Views are being sought on two potential actions 1) the development of a service for real-time interbank settlement of faster payments 24 hours a day, seven days a week, 365 days a year (24x7x365); and 2) the creation of a liquidity management tool that would enable transfers between Federal Reserve accounts on a 24x7x365 basis to support services for real-time interbank settlement of faster payments, regardless of whether those services are provided by the private sector or the Federal Reserve Banks.

FDIC Requests Information on Improving Communication with Banks and Other Stakeholders: The Federal Deposit Insurance Corporation (FDIC) announced on Monday that it is seeking comments on how the agency can maximize efficiency and minimize burden when communicating information to insured depository institutions, consumers, and others, about laws, rules, and related matters. The request is part of Chairman Jelena McWilliams' initiative to enhance transparency and accountability at the agency by improving communication between the FDIC, the public and the banking industry.

FDIC Chairman Announces Transparency and Accountability Initiative: Federal Deposit Insurance Corporation Chairman Jelena McWilliams on Wednesday announced a new, agency-wide "Trust through Transparency" initiative in a speech at the 2018 Community Banking in the 21st Century Research and Policy Conference in St. Louis, Missouri. Chairman McWilliams told the conference participants, "like any asset, trust must be earned and then preserved. In my view, the best way to maintain a trusting relationship is to be accessible, understandable, and responsive—to provide your stakeholders with the information and means to hold you accountable." Under the initiative, the FDIC launched a new section on its public website to provide new performance metrics that cross its business lines.

Regulators Issue Statement on Sharing Bank Secrecy Act Resources: The Federal Reserve, FDIC, Office of the Comptroller of the Currency, the National Credit Union Administration and the Treasury Department's Financial Crimes Enforcement Network on Wednesday issued a statement to address instances in which certain banks and credit unions may decide to enter into collaborative arrangements to share resources to manage their Bank Secrecy Act (BSA) and anti-money laundering (AML) obligations more efficiently and effectively. "This joint statement is part of a broader effort to work closely with our regulatory partners to strengthen the anti-money laundering defenses across the U.S. financial system," said Sigal Mandelker, Treasury Under Secretary for Terrorism and Financial Intelligence.

Watchdog Issues Report Warning of Cryptocurrency and Fintech Risks: The Council of Inspectors General on Financial Oversight issued its annual report on Wednesday, which discussed several challenges faced by regulatory agencies, HUD and the Treasury Department, particularly emphasizing the threats faced by technological innovation. The FDIC's inspector general highlighted that "the United States does not yet have a direct and comprehensive program to conduct oversight of the virtual currency markets."

CFTC Signs Agreement With Australian Regulators to Encourage Fintech Innovation: The U.S. Commodity Futures Trading Commission signed an agreement Thursday with the Australian Securities and Investments Commission to cooperate in efforts to encourage innovation in financial technology. The regulators said they will work through each other's "fintech" initiatives including LabCFTC, which the CFTC created last year, and ASIC's Innovation Hub, which Australia formed in 2015 in order to help fintech businesses navigate the country's regulatory system. "The signing of this arrangement with ASIC advances our mutual interest in facilitating technological innovation and development to enhance our respective markets," said CFTC Chairman Christopher Giancarlo.

SEC Official Defends Zero Trading Rebates Amid Protests by Exchanges: Brett Redfearn, head of the SEC's trading and markets division, said many asset managers have expressed support for the "zero-rebate bucket" included in a transaction-fee pilot program proposed in March, although the zero-bucket provision has been strongly opposed by stock exchange companies. "We would probably miss a really important opportunity if we did not include that, not study that," said Redfearn. The proposed pilot program is aimed at replacing the "maker-taker" payment model that stock exchanges routinely use to offer fees and rebates to traders to entice them to increase trading at their venues, and would test capping fees at various rates as well as the zero-rebate bucket that would ban fees altogether.

OTHER NOTEWORTHY ITEMS

Rep. Waters Calls for Investigation into Alleged CFPB Failures to Protect Student Loan Borrowers: On Monday, Rep. Maxine Waters (D-CA), Ranking Member of the House Committee on Financial Services, along with 12 other members of Congress, sent a letter to Rep. Jeb Hensarling (R-TX), Chairman of the Committee, urging him to use the full range of the Committee's oversight authorities to conduct a formal investigation into allegations raised by Seth Frotman, former Assistant Director and Student Loan Ombudsman at the Consumer Financial Protection Bureau in his August 2018 resignation letter. In the letter Mr. Frotman claimed that Mr. Mulvaney had "abandoned the very consumers it is tasked by Congress with protecting" by politicizing enforcement, prioritizing the protection of regulated entities, and suppressing the release of a staff report which allegedly exposed efforts to charge students dubious account fees.

Senators Call for Probe of Money Laundering in Real Estate Transactions: Senators Chris Van Hollen (D-MD) and Sheldon Whitehouse (D-RI) wrote a letter to Comptroller General Gene Dodaro, calling for the GAO to investigate whether gaps in the regulatory structure allow criminals to take advantage of the U.S. real estate market to launder money. In their letter they noted that application of the Bank Secrecy Act is "unevenly distributed across sectors of the economy," adding that "Residential real estate markets currently have fewer AML protections than lending financial institutions, presenting increased risk of access by foreign and domestic criminal organizations."

California Enacts Law Requiring Companies to Include Women on Boards: Governor Jerry Brown signed into law a new measure requiring publicly traded firms in California to include at least one woman on their board of directors by the end of 2019. California state Senator Hannah-Beth Jackson revealed in an interview with the WSJ that, "one-fourth of California's publicly traded companies still do not have a single woman on their board, despite numerous independent studies that show companies with women on their board are more profitable and productive."

CFTC Official Lauds Ruling for Bolstering Its Power to Prosecute Crypto Fraud: An official at the U.S. Commodity Futures Trading Commission on Wednesday praised a Massachusetts federal court decision in a fraud case that affirmed the CFTC's position that all virtual currencies, not just bitcoin, should be considered commodities that fall within the agency's jurisdiction. The ruling in CFTC v. My Big Coin Pay Inc. will allow the CFTC to pursue fraud charges against Randall Crater, the founder and lead salesman of My Big Coin, for allegedly lying about the value and financial backing of the virtual currency in order to steal $6 million from 28 people. "This is an important ruling that confirms the authority of the CFTC to investigate and combat fraud in the virtual currency markets," said James McDonald, the agency's director of enforcement, "We will continue to police these markets in close coordination with our sister agencies."

Senate Banking Plans Hearing on Oversight of GSE Pilots: The Senate Banking Committee has scheduled a hearing for Thursday, Oct. 18, on oversight of Fannie Mae and Freddie Mac's pilot programs. Fannie Mae CEO Timothy Mayopoulos, Freddie Mac CEO Donald Layton and Sandra Thompson, Deputy Director of the Federal Housing Finance Agency's Division of Housing Mission and Goals are scheduled to testify.