FACTBOX: Major U.S. financial regulation initiatives

(Reuters) - The Obama administration on Tuesday sent Congress its proposal for the creation of a Consumer Financial Protection Agency, part of a wide-ranging plan by the administration to tighten U.S. financial regulation to prevent another banking and market crisis.

If enacted, the changes would change the way banks, hedge funds, exchanges and other segments of the financial services industry do business.

Firms whose business models could be at risk under the proposed changes are listed below under "political risk exposure."

The broad proposal was unveiled by the administration on June 17 and covered some of the major issues listed below:

SYSTEMIC RISK REGULATION:

The Obama administration is proposing to put the Federal Reserve in charge of supervising systemically important and interconnected firms.

Under the Obama plan, the Fed would monitor systemic risk together with a council of regulators that would replace the President's Working Group on Financial Markets. The council would help identify firms to be regulated by the Fed.

It would be led by the secretary of the Treasury and include the Fed chairman, the director of a new National Bank Supervisor, the director of a new Consumer Financial Protection Agency, the chairman of the Securities and Exchange Commission, the chairman of the Federal Deposit Insurance Corp and the director of the Federal Housing Finance Agency.

RESOLUTION AUTHORITY:

A federal government mechanism would be set up for "orderly resolution of any financial holding company whose failure might threaten the stability of the financial system" under the Obama plan.

Draft legislation for this "resolution authority" has already been proposed by the administration, giving the FDIC this new duty. Republicans are countering with a proposal to create a new chapter in the bankruptcy code.

CONSUMER, INVESTOR PROTECTION:

An independent Consumer Financial Protection Agency would be formed under the Obama plan to oversee products ranging from mortgages to credit cards. It would be mandated to promote transparency, simplicity, fairness, accountability and access in the market for financial products and services.

The agency would be able to prescribe rules and would have supervisory and examination authority for consumer compliance, taking away these powers from current bank regulators. It could enforce compliance with orders and penalties. For details, see [ID:nN30438968]

The agency could require securitized loan originators to retain 5 percent of credit risk, while it would also define standards for "plain vanilla" financial products.

It would establish a consumer and investor protection council made up of heads of the SEC, the Federal Trade Commission, the Justice Department, the Consumer Financial Protection Agency and other agencies.

There is already legislation in Congress to set up a Financial Product Safety Commission.

BANK REGULATION:

Bank regulation would be streamlined, under the Obama plan. A new National Bank Supervisor would take over the functions of both the Office of Thrift Supervision and the Office of the Comptroller of the Currency, which are Treasury units.

The Obama plan would eliminate the charter for thrifts that underlies the U.S. savings and loan industry.

Some lawmakers want more consolidation of banking supervision than the administration has proposed.

CAPITAL AND LIQUIDITY STANDARDS:

Financial institutions would have to strengthen their capital cushions to absorb losses when times are tough, and make themselves more liquid, or able to move quickly in and out of various holdings, "with more stringent requirements for the largest and most interconnected firms," under the plan.

This part of the plan has broad international implications, with the European Union eyeing similar changes.

SECURITIZATION:

Issuers of asset-backed securities would face new reporting requirements and be required to keep at least 5 percent of the performance risk in loans they securitize, under the plan.

Transactions would be more standardized and regulators would expand electronic trade reporting, while compensation of securitizers would be linked to long-term performance and the interests of borrowers and investors.

Sponsors of securitizations would have to stand behind securitized products sold to investors with warranties.

The 5-percent skin-in-the-game mandate was included in a bill already approved by the House and now languishing in the Senate, complicating handling of this part of the Obama plan.

Political risk exposure: Citigroup, Wells Fargo, Bank of America, JPMorgan Chase

CREDIT RATING AGENCIES:

Reliance by regulators on credit rating agencies would be reduced by changing some legal rules covering debt issuance that encourage the use of credit ratings under the plan.

The SEC is already considering reforms of potential conflicts of interest at credit rating agencies. Final action is likely months away.

Political risk exposure: Moody's Corp, Standard & Poor's, Fitch Ratings

OTC DERIVATIVES:

Oversight of over-the-counter derivatives would be imposed, as well as "harmonizing" of futures and securities rules and stronger payment and settlement safeguards, under the plan.

Market regulators would be given powers to take "vigorous enforcement action" against fraud and market manipulation.

The administration wants to process more trading through exchanges and clearinghouses, supervise dealers more closely, and make this opaque market more transparent.

The scope of OTC derivatives reform will largely be decided by legal definitions such as which derivatives are "standardized" and which are "customized," as well as which are moved through exchanges, which to central clearinghouses, and which are only subjected to increased disclosure.

Political risk exposure: JPMorgan Chase, Bank of America Corp, Citigroup, Goldman Sachs, CME Group Inc, IntercontinentalExchange

HEDGE FUNDS, PRIVATE EQUITY:

The Obama plan would require hedge funds and other private pools of capital to register with the SEC.

Lawmakers have introduced several bills in Congress to give the SEC authority to require hedge funds to register.

Political risk exposure: Bridgewater Associates, D.E. Shaw Group, Farallon Capital Management, Citadel Investment Group, Fortress Investment Group, many others.

EXECUTIVE PAY:

The Obama administration wants to reform financial industry pay practices to discourage excessive risk-taking.

On June 10, it named Kenneth Feinberg as its pay tsar to police the compensation of top employees at companies receiving "exceptional" aid from the government.

The administration also urged giving shareholders more say on setting executive salaries, a long-cherished goal of investor rights activists.

SHORT-SELLING:

The SEC will meet soon to finalize an interim rule that requires large short sellers to disclose their positions to the agency. It is unclear if the agency will require the positions to be disclosed publicly.

The agency is also considering proposals to restrict short-selling, including restoration of an updated uptick rule, which allows shorting only when a stock's last sale price was higher than the previous price.

STUDENT LOANS:

President Barack Obama's 2010 federal budget proposed ending the federally guaranteed student loan program and moving most of the country's $90 billion in student lending into the direct-loan program run by the Education Department.

The proposal is under review by Congress.

Political risk exposure: Sallie Mae (SLM Corp), Student Loan Corp, JPMorgan, Bank of America, ITT Educational Services, Corinthian Colleges

INSURERS:

The administration called for establishing a new Treasury Department Office of National Insurance that would monitor the industry and gather data, but not regulate.

Political risk exposure: Allstate Corp, Travelers Cos Inc, Hartford Financial, MetLife Inc, Prudential Financial Inc