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Washington Wrap — Congress to mull GSE reform; SEC delays trade disclosures rule

The Washington Wrap is a weekly recap of financial regulation, news and chatter from around the capital. Send tips and ideas to polo.rocha@spglobal.com, david.hood@spglobal.com and declan.harty@spglobal.com.

At the regulators

Two federal agencies unveiled their respective plans to overhaul the U.S. housing finance system, which included their shared objective of releasing mortgage giants Fannie Mae and Freddie Mac from conservatorship.

The reports were released 11 years to the day that the government-sponsored enterprises were placed into conservatorship. The Department of Housing and Urban Development focused its report on housing availability and other housing reforms, while the Treasury Department's report focused on finance.

Treasury laid out 10 preconditions to remove GSEs from conservatorship and listed ideas that the Federal Housing Finance Agency, the companies' chief regulator, can implement to allow Fannie and Freddie to retain earnings. Under current rules, the companies can only retain $3 billion per quarter. Any amount more is paid to Treasury through its preferred share purchase agreement known as the "net worth sweep."

The department floated several ideas to allow the companies to "recapitalize." Among them were to adjust the net worth sweep provision; allow the GSEs to issue common or preferred shares through public or private offerings; and to place the GSEs into receivership "to the extent permitted by law, to facilitate a restructuring of the capital structure."

Treasury's report outlined nearly 50 recommendations that the FHFA and Congress can implement to fundamentally revamp the U.S. housing finance system.

FHFA Director Mark Calabria wrote in a statement that he will work with the Trump administration and Congress to "chart a path forward that achieves" three sweeping objectives, which will be "creating a competitive mortgage market with a limited government role, ensuring taxpayers never again have to rescue Fannie Mae and Freddie Mac and paving the way for sustainable and affordable housing for homeowners across America."

In Congress

The administration's plans now head to Capitol Hill, where a landmark hearing has already been scheduled by the Senate Banking Committee to include Treasury Secretary Steven Mnuchin, HUD Secretary Ben Carson and Calabria.

Sen. Mike Crapo, R-Idaho, chair of the Senate Banking Committee, wrote in a statement that his preference is to overhaul the housing finance system through legislation, but he encouraged the executive branch to move forward with its proposals, which he said are consistent with an outline he released in February.

Crapo's outline laid out legislative principles to be included in a GSE reform bill that has yet to materialize in the upper chamber.

"Fannie Mae and Freddie Mac contributed to the housing bubble and subsequent crash and are too big to fail," Crapo wrote. "Eleven years after being bailed out and put into conservatorship, it is time to make the hard decisions and strengthen our housing finance system."

Since the GSEs were placed into conservatorship, legislative reform to the system has eluded Congress.

Rep. Maxine Waters, D-Calif. and chair of the House Financial Services Committee, released her own statement that said the administration's proposals appear to "diminish opportunities for homeownership, increase housing costs or make housing less available."

Waters wrote that one of the "most egregious" parts of the proposal is the replacement of the affordable housing goals with a fee that "would fail to adequately support affordable housing. This would hamper the ability of millions of underserved families to achieve the dream of homeownership."

Waters wrote that she is planning a hearing to address those concerns with administration officials directly, although the hearing has not been scheduled as of Sept. 6.

At the SEC

Broker/dealers will now have until January 2020 before they have to start providing specific details about where they route clients' stock trades.

On Sept. 4, the SEC granted a three-month extension to provide the broker/dealer community additional time to comply with a set of 2018 rule changes related to order handling and routing disclosures. Under those reforms, broker/dealers will have to provide customers with a standardized set of disclosures detailing the average rebate they receive from a trading venue and the fees they pay to those companies, when they are asked to do so.

The rule changes marked a major win for parts of Wall Street, as many market participants have longed for more transparency from broker/dealers about where they route their clients' orders.

At issue is ultimately the payment of rebates in the marketplace, which are used by certain exchange operators as a way of fueling trading activity on their venues. Critics of the practice claim that rebates incentivize broker/dealers to route their clients' orders to the venue with the highest rebate, rather than the one with the best price.

At the Fed
The Federal Reserve will re-propose its stress capital buffer for large banks soon, though the regulator should scrap a couple of its original provisions, Fed Vice Chairman for Supervision Randal Quarles said Sept. 5.

Quarles said in a speech that he hopes the Fed will put out a revised proposal "in the near future" so it can be in place for big banks' 2020 stress test cycles.

He mentioned a couple of changes he would favor making to the Fed's original proposal in April 2018. The Fed should eliminate a separate stress leverage buffer standard that "seems out of place and unnecessary" given that the Fed already requires banks to meet certain leverage ratios, Quarles said. He also favored removing a portion of the stress capital buffer proposal requiring that banks pre-fund their planned dividend payments for the next four quarters, saying the stress capital buffer already offers ways of curbing dividends if needed.

The revised proposal would be subject to public comment.

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