US regulation ‘set for overhaul, not dismantling’

Six weeks after the Trump administration took office, a report from Société Générale considers what regulatory changes could be in prospect for the US and their likely implications for the rates market.

“The reflation move out of the US elections was supported by an expectation for action around three main policy vectors: tax reform, infrastructure spending, and regulatory easing,” SG notes. “As we have argued… of the three policy vectors, perhaps the easiest to deliver on is regulatory easing

The paper, entitled ‘Regulatory easing – a brave new world’ has been written by Subadra Rajappa, the bank’s head of US rates strategy, whose findings include the following:

  • Reflation expectations have been predicated on the hope for a pro-growth policyagenda centred on three main vectors: tax reform, infrastructure spending, and regulatory easing. President Trump kick-started the process on the regulatory front with an executive order to fix the Dodd-Frank Act.
  • In the spirit of an overhaul (rather than a dismantling), Rajappa sees the following portions of the current regulatory framework as particularly exposed to the administration’s efforts: the Volcker Rule, Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act Stress Test (DFAST) frameworks, liquidity and capital requirements for financial institutions (liquidity coverage ratio (LCR), net stable funding ratio (NSFR) and total loss absorbing capacity (TLAC)), swap execution facilities (SEFs) and the swap trading regime, and the fiduciary rule.

On the implications for rates, Rajappa notes several themes:

  1. Increased liquidity conditions, with a likely decrease in the significance of liquidity events and a broader positive impact in the less liquid corners of the market, like off the-run issues.
  2. A bias towards bearish implications for rates.
  3. While increased levels of corporate issuance to meet TLAC and long-term debt (LTD) requirements may be slightly bearish for spreads, structurally, an environment where dealers are allowed to operate with larger balance sheets supports spread wideners.
  4. A bias towards further tightening in bid/offer spreads for swaps.
  5. A bias towards downward pressure for intermediate and long expiries on the left side of the volatility grid.

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