| WASHINGTON, June 12
WASHINGTON, June 12 A top U.S. securities
regulator on Thursday called for her agency to beef up its
capital requirements for brokerages, saying current rules fall
short and do not protect markets if a large firm fails.
"Given the systemic risks posed by some of the firms we
regulate, I think it's about time for the SEC to revise its
reasoning for imposing capital requirements," said Kara Stein, a
Democratic member of the Securities and Exchange Commission, in
Stein's call for tougher broker capital rules is likely to
spark a debate in Washington, both at the SEC and potentially
among the members of the Financial Stability Oversight Council
(FSOC) - a body of regulators that polices the market for
The FSOC, which is chaired by the Treasury Secretary, has
been closely monitoring whether certain firms regulated by the
SEC could pose broader systemic risks, and should be
"designated" for additional regulations and oversight by the
The group has mostly focused its attention in the past year
on large asset managers.
However, a recent FSOC annual report also outlined possible
risks posed by broker-dealers, particularly in the area of
securities lending and the role they play in the short-term
funding and tri-party repo market.
The SEC serves as the primary regulator for broker-dealers.
Both the SEC, and the Wall Street-funded Financial Industry
Regulatory Authority, are responsible for inspecting them for
compliance and ensuring they are abiding by net capital rules.
Historically, the SEC's capital rule approach to regulation,
however, has been very different from the capital regime for
Bank capital rules are generally designed to reduce risk,
protect against losses and improve safety and soundness.
Net capital rules for brokerages, however, are more geared
toward risk-management, so that if a brokerage fails, it can be
liquidated and customers' money can be transferred to another
But Stein questioned this model in a post-financial crisis
world. And she was also critical of 2004 SEC reforms which
allowed the largest brokerages to rely on their own risk
modeling to calculate their capital.
"When we let broker-dealers use their own models, what do
you think happened? You guessed it. The models led to less
capital," she said.
She also said it was high time to establish "meaningful
minimum haircuts" for all types of securities lending and repos,
noting that even high-quality assets could pose risks.
Stein's remarks, delivered at the Peterson Institute for
International Economics, were part of a wide-ranging speech
about systemic risks to the marketplace.
In it, she also criticized the ongoing turf battles between
the SEC, the FSOC and the FSOC's research arm.
Since last year, some staff at the regulator have clashed
with the FSOC over its focus on asset managers and the quality
of the research into whether large fund managers pose systemic
"The FSOC's mission is far too important to be bogged down
in a regulatory turf war," she said.
(Reporting by Sarah N. Lynch; Editing by Sofina Mirza-Reid)