HFT GSE SIFI FMU OMG

The electronic trading world and its shady links with certain entities and for profit exchanges continues to dominate the airwaves. Behind that discussion, a little followed rule from Dodd-Frank is coming to shape. Here's some background, uncovered digging around with Matt Boesler of Business Insider:

Basics- The fed pays IOER to entities that have accounts with it. This operation started as crisis response so the political environment was too toxic to ask that the GSEs be given accounts at the Fed. Fast tracking MS and GS into "covered banks" had to get done. Since GSEs (and other shadow banking entities) would find themselves sloshing cash around, the FF rate would/could fall below the target area of the Fed.

Hanging at ZIRP, few cared but the hope to someday return to normal meant a "floor" needed to be supported. Term Deposit Facility and the Death Star came into being. Heavy new regulation was also, and continues to be, loaded on the system. Systemically Important Financial Institutions (SIFI) crystallized TBTF in the new landscape. Exchanges and Clearing Corps, having moved to for-profit public Cos, added a new layer of coverage to the system. Enter the Financial Market Utility (FMU). Now, under Dodd-Frank, since Feb 18, The FMUs have accounts at the Fed (and fairly large cash balances sloshing around as much OBS OTC activity is now on). The Fed is "deciding" what rate these FMUs will receive on these balances. Everyone else, into the Death Star beam.

I find it odd that while outrage and regulatory fighting on HFT, maker-taker and "rebates" takes the center stage...The government has allowed the Fed to "electronically mark up the balances" of the same institutions. Right hand....meet Left.

Developing, Scratching Head, Meh

 

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