CAPITAL MARKETS REGULATION Harvard Kennedy School / Harvard Law School Course Syllabus, Spring Semester 2016 Wednesdays, 5-7pm Law School Campus, 1563 Massachusetts Avenue Instructors Professor Robert Glauber Office: Belfer 506, Harvard Kennedy School Phone: (617) 495-4691 E-mail: [email protected]

Professor Hal Scott Office: Lewis 339, Harvard Law School Phone: (617) 495-4590 E-mail: [email protected]

Faculty Assistants For Professor Robert Glauber: Assistant: Minoo Ghoreishi Phone: (617) 384-7329 E-mail: [email protected]

For Professor Hal Scott: Assistant: Josi Chapman Phone: (617) 495-3579 E-mail: [email protected]

Office Hours Professor Robert Glauber Wednesdays, 2:o0pm-4:00pm, Or preferably by appointment

For Professor Hal Scott: By Appointment

Course Assistant James Howat (HKS, MPP2) Class Schedule Class #

Date

Topic

Lead / Guest

Time

1

Wed Feb 3rd

Objectives of Financial Regulation

Glauber, Scott

5:00-7:00

2

Fri Feb 5th

Systemic Risk: Correlation, Connectedness and Contagion

Scott

3:15-5:15

3

Wed Feb 10th

Capital and Liquidity

Kuritzkes

4

Wed Feb 17th

Resolution

Krimminger

5

Wed Feb 24th

Lender of Last Resort

Kohn

6

Wed Mar 2nd

Volcker Rule and Too Big to Fail

Glauber

7

Wed Mar 9th

Derivatives and Clearing

Massad

8

Wed Mar 23rd

GSE Reform

Golding

9

Wed Mar 30th

Money Market Funds & Shadow Banking

Scharfstein

10

Wed Apr 6th

Market Structure: Dark Pools, High Frequency Trading and Decimalization

Chan

11

Wed Apr 13th

Cost Benefit Analysis

Scott

12

Wed Apr 20th

Regulatory Structure

Glauber

1

5:00-7:00

Mission Statement I. Analyze current U.S. government policy on issues relating to: a. Financial Institutions; b. Regulation; and c. Capital Markets II. Debate the formulation, implementation, and impact of regulatory policy on the capital markets and the financial system, emphasizing current issues. III. Enrich classroom discussion with guest speakers. Course Overview This course examines important current issues in the regulation of the U.S. capital markets, with emphasis on the recent financial crisis, reform efforts thus far, and potential future actions. The class will be primarily one of discussion rather than lecture. As noted in the syllabus, we will have regular guest speakers. This course does not have any prerequisites and there is not an expectation that students will have prior professional or academic work in this field. A useful resource for students with no exposure to any of these topics is the website of MIT Sloan Professor Simon Johnson (http://baselinescenario.com/financial-crisis-for-beginners/). Grading There will be a take-home open book final exam that will count for 75% of your grade; the balance of the remaining 25% will be based on participation in class discussions. Participation After the end of the add-drop period, panels of approximately 8-10 students will be designated for each class. Members of that panel will be expected to lead discussion in their assigned class and, as a group, to have full command of all readings for the class, including optional readings. For other class meetings, each panel should also coordinate among themselves to make sure that at least one member in each group has read each of the optional readings, in addition to the required readings. To the extent feasible, panel members should arrange to meet together before every class session to have a preliminary discussion of class readings. All students should feel free to participate in each class discussion. Reading Material Readings will be available on the course website in digital format only. It will not be available in hard copy. On the syllabus, all required readings are marked with an asterisk (*). All other readings are optional. Harvard students can log on to the course website with their Harvard University ID and PIN at: canvas.harvard.edu. Students that are not yet enrolled will have to email Josi Chapman directly at [email protected] to gain access to the reading materials. Non-Harvard students should contact Josi Chapman: [email protected] to find out how to gain access to the course website (access protocol varies according to originating school).

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Class 1 - Objectives of Financial Market Regulation Wednesday, February 3 Economic literature suggests a number of possible rationales for financial regulation, including: externalities (such as systemic risk), information asymmetries, consumer protection (e.g. deposit insurance), principal-agent problems, maintenance of competition, and limitation of moral hazard due to government supports. But financial regulation needs to be both justified by such rationales and also effective. Some dimensions of effectiveness might include efficiency and economy; a role for management in assuring regulatory compliance; proportionality to require that restrictions on firms and market behavior be in proportion to expected benefits to consumers and industry; international harmonization of regulation; and the avoidance of unnecessary distortions or impediments to competition. The Dodd-Frank Act of 2010 is the most recent and in many dimensions an extraordinarily sweeping regulatory intervention into the financial markets. The course will focus in many sessions on various dimensions of this Act’s interventions and seek to evaluate the effectiveness of this legislation. The first class will provide an introduction in the concepts underlying financial regulation and an introduction to the Dodd-Frank Act and an overview of recent. It will also discuss the implications of financial regulation for the competitiveness of U.S. capital markets. Introduction to Capital Markets Regulation in the U.S. *Murphy, E. “Who Regulates Whom and How? An Overview of the U.S. Financial Regulatory Policy for Banking and Securities Markets,” Cornell University ILR School, May 28, 2013. Summary & pp.1-14 (required), 15-51 (optional). Scott, H. & Gelpern, A., International Finance: Transactions, Policy and Regulation, 20th Edition, Foundation Press, 2014 (pp. 88-123). Principles of Regulation *Committee on Capital Markets Regulation, “Global Financial Crisis: A Plan for Regulatory Reform,” May 2009 (pp.27-32). *Brunnermeier, B., et. al,. “The Fundamental Principles of Financial Regulation,” International Center for Monetary and Banking Studies, Geneva Reports on World Economy, Preliminary Conference Draft, 2009 (pp.1-10). *DiGiorgio, G., DiNoia, C. & Piatti, L., “Financial Market Regulation: The Case of Italy and a Proposal for the Euro Area,” Wharton Financial Institutions Center, June 2000 (pp.3-10). Overview of the Dodd-Frank Act *Webel, B., “The Dodd-Frank Wall Street Reform and Consumer Protection Act: Issues and Summary,” Congressional Research Service, July 29, 2010 (pp.1-22). * Davis Polk, “Dodd-Frank Progress Report, Five-Year Anniversary Report”, July 2015, (pp.1-7).

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*Frank, B., “Assessing the Impact of the Dodd-Frank Act Four Years Later”, Testimony before the House Committee on Financial Services, July 2013 (pp.3-8). *Scott, H., “Dodd-Frank’s Panic Problem,” Politico, August 6, 2013 (pp.1-2). Baily, M, et al., “The Impact of the Dodd-Frank Act on Financial Stability and Economic Growth,” Brookings presentation, October 2014 (pp. 1-26). *Wallison, P, “The Dodd-Frank Act Five Years Later: Are we more prosperous?,” American Enterprise Institute, Congressional Testimony before the House Committee on Financial Services, July 2015 (pp2-13). Davis Polk, “Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act,” July 21, 2010, (pp.1-130). [This summary will be a useful reference, particularly for the first half of the course.] Competitiveness of U.S. Capital Markets *Committee on Capital Markets Regulation, “Interim Report of the Committee on Capital Markets Regulation,” November 30, 2006 (pp.1-7). *Committee on Capital Markets Regulation, “U.S. capital market competitiveness showed historic and alarming signs of weakness in the third quarter of 2015,” Press Release, November 12, 2015 (pp.1). *Scott, H. and Silverman, L., “Stockholder Adoption of Mandatory Individual Arbitration For Stockholder Disputes," Harvard Journal of Law & Public Policy, Vol.36, No.3, 2013 (pp.11871192). *Staff, “Reinventing the Company,” The Economist, October 2015 (pp1-3). Howson, N, et al., “Reverse Cross-listings -- The Coming Race to List in Emerging Markets and an Enhanced Understanding of Classical Bonding”, Law & Economics Working Papers. Paper 109, 2014 (pp.1-3, 21-24,29-31). Hong Kong Securities and Futures Commission, “SFC statement on the SEHK’s draft proposal on weighted voting rights,” Press Release, June 25, 2015. Clinton, H., “Wall Street Should Work For Main Street,” Briefing Paper, October, 2015 (pp. 6-9) (The section titled “Hold both individuals and corporations accountable when they break the law”).

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Class 2 - Systemic Risk: Correlation, Connectedness and Contagion FRIDAY, February 5 One of the central features of the recent financial crisis was the fear of systemic risk. Following the failure of Lehman Brothers, many believed that the subsequent failure of any large, interconnected financial institution would have devastating impacts on the financial system. An alternative view is that the primary danger comes from contagion runs rather than the interconnectedness of firms causing cascading bankruptcies. The Dodd-Frank Act sought to reduce systemic risk through, among other actions, the identification of systemically important institutions and the creation of the Financial Stability Oversight Council (FSOC). This class will focus on an overview of systemic risk as a concept, how it manifested itself in the 2008 financial crisis, and current regulation of systemic risk in the U.S. Overview of Systemic Risk *Scott, H. & Gelpern, A., International Finance: Transactions, Policy and Regulation, 20th Edition, Foundation Press, 2014 (pp. 23-34). *Taylor, J., “Systemic Risk and the Role of Government,” Keynote Speech, Conference on Financial Innovation and Crises, Federal Reserve Bank of Atlanta, May 12, 2009 (pp. 1-7). Institute of International Finance, “Systemic Risk and Systemically Important Firms: An Integrated Approach,” May, 2010 (pp. 17-23). Committee on Capital Markets Regulation, Memorandum to Chairman Dodd and Ranking Member Shelby: Systemically Important Institutions, May 4, 2010 (pp. 1-3). Correlation, Connectedness, and Contagion *Scott, H., “The Concept of Connectedness,” Chapter 1, Connectedness and Contagion, 2015 (pp.3-4). *Scott, H., “The Concept and History of Contagion,” Chapter 2, Connectedness and Contagion, 2015 (pp.5-6, 9-13). *Scott, H., “The Concept of Correlation,” Chapter 3, Connectedness and Contagion, 2015 (pp.1516). *Bank of England, “Banking Sector Interconnectedness: what it is, how we can measure it and why it does matter,” Quarterly Bulletin, Q2, 2015, pp1-9. Allahrakha, M, et al, “Systemic Importance Indicators for 33 U.S. Bank Holding Companies: An Overview of Recent Data”, OFR Brief Series, February 2015, (pp1-7). *Geithner, T., “Congressional Testimony on AIG,” Reprinted by Wall Street Journal, March 24, 2009 (pp. 1-4). *Geithner, T., “The Paradox of Financial Crisis,” Wall Street Journal, May 13, 2014, (pp.1-3).

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Hennessy, K., Holtz-Eakin, D., Thomas, B., “Dissenting Statement, Financial Crisis Inquiry Report,” Financial Crisis Inquiry Commission, January 2011 (pp. 417-439). Current Regulation of Systemic Risk *Financial Stability Oversight Council, “2015 Annual Report,” May 19, 2015 (pp. 3-7, 9-17). *Bernanke, B., “Implementing a Macroprudential Approach to Supervision and Regulation,” Remarks given at the Federal Reserve Bank of Chicago 47th Annual Conference on Bank Structure and Competition, Chicago, Illinois, May 5, 2011 (pp. 1-14). Yellen, J., “Monetary Policy and Financial Stability,” Federal Reserve, July 2, 2014 (pp.9-16). *Jopson, B., et al, “Big US Fund Managers Fight Off Systemic Label,” Financial Times, July 14 2015 (pp.1-5). *Committee on Capital Markets Regulation, Comment Letter to FSOC on Systemically Important Institutions, November 5, 2010 (pp. 1-5). Wallison, P., “MetLife Calls The Regulators’ Bluff,” Wall Street Journal, July 7 2015 (pp1-3). *U.S. Department of the Treasury, “FSOC Makes First NFC Designations to Address Threats to Financial Stability,” Press Release, July 9, 2013 (pp. 1-2). *Financial Stability Board, “2015 update of lists of global systemically important banks” (GSIBs),” November 3, 2015 (pp. 1-3). *Financial Stability Board, “2015 update of lists of global systemically important insurers (GSIIs),” November 3, 2015 (p. 1-4). Tarullo, D., “Advancing Macroprudential policy objectives”, remarks at the Office of Financial Research and Financial Stability Oversight Council's 4th Annual Conference on Evaluating Macroprudential Tools: Complementarities and Conflicts, Arlington, Virginia, January 30, 2015 (pp. 3-13). Heltman, J., “Macroprudential’: A Real World Cure or Just a Buzzword?,” American Banker, January 22, 2015 (pp.1-3).

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Class 3 – Capital and Liquidity Wednesday, February 10 Capital requirements have become an integral feature of the safety and soundness regulatory regime for financial institutions. While capital requirements are designed to decrease the probability of failure for institutions, the financial crisis led many to conclude that existing requirements were insufficient. The international Basel III reforms that are currently being implemented have not only significantly increased minimum capital requirements, but have also placed greater emphasis on the types of capital that qualify for regulatory purposes, imposed new liquidity requirements and layered on additional requirements for systemically important institutions. Evaluating these changes, some have argued that the new capital requirements are overly burdensome and complex; others maintain that the increased capital levels will come at a significant cost, increasing borrowing costs, and also potentially harming future GDP growth. This class will examine the role of capital requirements in financial regulation, the Basel III reforms, and the costs and benefits of higher capital levels and new liquidity requirements. Guest Speaker Mr. Andrew Kuritzkes, Executive Vice President and Chief Risk Officer, State Street Corporation Mr. Kuritzkes is responsible for leading State Street Corporation’s risk management function globally. He is also a member of State Street’s Management Committee, the company’s most senior strategy and policy-making team. Prior to joining State Street in 2010, Mr. Kuritzkes was a partner of Oliver Wyman and led the firm’s public policy practice in North America. He was a managing director in the firm’s London office from 1993 to 1997, and served as vice chairman of Oliver, Wyman & Company globally from 2000 until the firm’s acquisition by MMC in 2003. From 1986 to 1988, he worked as an economist and lawyer for the Federal Reserve Bank of New York. Mr. Kuritzkes serves as a member of the Financial Research Advisory Committee of the US Treasury’s Office of Financial Research. He is also a member of the Financial Advisory Roundtable of the Federal Reserve Bank of New York, and is a member of the US Committee on Capital Markets Regulation. Mr. Kuritzkes holds a Juris Doctor degree from Harvard Law School, a Master of Philosophy degree in economics from Cambridge University and a Bachelor of Arts degree from Yale College. Capital and Liquidity Requirements in General *Tarullo, D., “Equipping Financial Regulators with the Tools Necessary to Monitor Systemic Risk,” Testimony before the Banking Subcommittee on Security and International Trade and Finance, U.S. Senate, Washington, D.C., February 12, 2010 (pp. 1-12). *Scott, H., “Capital Requirements: Basel II Framework ,” Chapter 14, Connectedness and Contagion, 2015 (pp.3-4). *Scott, H., “Liquidity Requirements,” Chapter 15, Connectedness and Contagion, 2015 (pp.1-3).

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*Admati, A. et al., “Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Socially Expensive,” Rock Center for Corporate Governance, Working Paper Series No. 161, October 22, 2013 (Required –pp.i-6, Optional pp.818, 61). *Elliott, D., “Bank Liquidity Requirements: An Introduction and Overview, The Brookings Institution, June 23, 2014 (pp.1-5). Basel III *Scott, H., “Capital Requirements: Basel II Framework ,” Chapter 14, Connectedness and Contagion, 2015 (pp.4-20). *Basel Committee on Banking Supervision, “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems,” Revised version: June 2011 (pp. 1-11). *Basel Committee on Banking Supervision, “Eighth Progress Report on Adoption of the Basel Regulatory Framework,” April 2015 (pp.1-3). *Board of Governors of the Federal Reserve System, GSIB Capital Proposal, Press Release, July 20, 2015. *Board of Governors of the Federal Reserve System, “Agencies Adopt Enhanced Supplementary Leverage Ratio Final Rule and Issue Supplementary Leverage Ratio Notice of Proposed Rulemaking” Press Release, April 8, 2014. *Scott, H., “Liquidity Requirements,” Chapter 15, Connectedness and Contagion, 2015 (pp.3-9). *Board of Governors of the Federal Reserve System, “Federal Banking Regulators Finalize Liquidity Coverage Ratio,” Press Release, September 3, 2014. *Tarullo, D., “Liquidity Regulation,” Remarks at The Clearing House 2014 Annual Conference, November 20, 2014 (p.1-20). *Grind, K., Sterngold, J. and Chung, J., “Banks Urge Clients to Take Cash Elsewhere,” Wall Street Journal,” December 7, 2014 (pp.1-5). *Heltman, J., “Inside the Blackbox of the Fed’s Stress Test,” American Banker, February 27 2015. *Tarullo, D., “Stress Testing after Five Years,” Remarks at the Federal Reserve Third Annual Stress Test Modelling Symposium, June 25, 2014 (pp.5-8). *Ozdemir, B., et al, “Can Basel 4 Work? What Can Go Wrong? An Examination of the New Basel Proposals,” Paper presented at the International Model Risk Management conference, June, 2015 (pp. 3-4, 21-3).

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*Board of Governors of the Federal Reserve System, “Guidelines for 2015 Capital Planning and Stress Testing Program,” Press Release, October 23, 2014. *Financial Stability Board, “Financial Reforms: Finishing the Post-Crisis Agenda and Moving Forward,” Letter to G20 Leaders, February 2015 (pp. 1-4). *U.S. Government Accountability Office, “Initial Effects of Basel III on Capital, Credit, and International Competitiveness,” November 2014. *Banerjee, R. and Mio, H., “The Impact of Liquidity Regulation on Banks,” Bank for International Settlements, BIS Working Papers No. 470, October 2014 (pp.1-4). Haldane, A., “The Dog and the Frisbee,” Speech delivered at the Federal Reserve Bank of Kansas City’s 366th Economic Policy Symposium, Jackson Hole, WY, August 31, 2012 (pp. 1-34). Wallison, P., “A Bridge Too Far: The Basel II Bank Capital Accord,” American Enterprise Institute, Financial Services Outlook, November 2006 (pp. 1-6).

Class 4 – Resolution Wednesday, February 17 While the Federal Deposit Insurance Corporation (FDIC) has traditionally been in charge of “resolving” failing depository banks, other financial institutions have been subject to the normal bankruptcy process. During the financial crisis many argued that these existing procedures were inadequate for resolving large, interconnected bank holding companies and non-bank financial institutions, and thus led to the requirement of injecting public funds, most prominently through TARP. This class will examine the operation by the FDIC, pursuant to Dodd-Frank, of new resolution procedures for systemically important institutions (most recently the “singlepoint of entry” procedure) and whether these procedures have solved the “too big to fail” problem. Guest Speaker Mr. Michael H. Krimminger, Partner, Cleary Gottlieb Mr. Krimminger’s practice focuses on domestic and international banking and financial institutions. In particular, he advises on the challenges and opportunities stemming from statutory and regulatory reforms, as well as a variety of restructuring and insolvency-related matters. Mr. Krimminger joined Cleary Gottlieb in 2012 after serving for more than two decades in numerous leadership positions with the Federal Deposit Insurance Corporation (FDIC), including most recently as its General Counsel. Mr. Krimminger's international experience includes serving as the co-chair of the Basel Committee's Cross Border Resolutions Group and representing the FDIC on the Financial Stability Board's Resolution Steering Group and other bodies. He earned his undergraduate degree from the University of North Carolina and his J.D. from Duke University. Resolution

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*Simmons, R., “Single Point of Entry Strategy,” Banking Perspective, Quarter 1 2014, Clearing House (pp.36-43). Federal Deposit Insurance Corporation, “Resolution of Systemically Important Financial Institutions: The Single Point of Entry Strategy,” FDIC Federal Register, Volume 78, No. 243, December 18, 2013 (pp. 76614-76624). *Scott, H., “Bank Resolution Procedures, Contingent Capital (CoCos), and Bail-Ins,” Chapter 16, Connectedness and Contagion, 2015 (pp.1-5, 9-19). *Scott, H., “Dodd-Frank Orderly Liquidation for Non-Bank SIFIs (including Bank Holding Companies),” Chapter 17, Connectedness and Contagion, 2015 (pp.6-17). *Scott, H., “Living Wills,” Chapter 18, Connectedness and Contagion, 2015 (pp.1-5). *Pellerin S. & Walter, J., “Orderly Liquidation Authority as an Alternative to Bankruptcy,” Economic Quarterly, Volume 98, Number 1, 2012 (pp. 1-5, 1o19). *Baxter, T., “Resolving the Unresolvable: The Alternative Pathways to Ending Too Big to Fail,” Remarks at the International Insolvency Institute 13th Annual Conference, Columbia University Law School, New York City, June 17, 2013 (pp. 1-6). *Morrison, E., "Is the Bankruptcy Code an Adequate Mechanism for Resolving the Distress of Systemically Important Institutions?" Temple Law Review, Volume 82, No. 449, 2009 (pp. 449463). *Scott, K. & Taylor, “How to Let Too Big to Fail Banks Fail,” The Wall Street Journal, May 15, 2013 (pp. 1-3). *House Financial Services Committee, “The Dodd-Frank Act and the Persistence of “Too Big To Fail,” 2014 (pp.1-9). *Konzcal, M., “Sheila Bair: Dodd-Frank Really Did End Taxpayer Bailouts,” Washington Post, May 18, 2013 (pp. 1-5). *McCracken, J., “Lehman's Chaotic Bankruptcy Filing Destroyed Billions in Value,” The Wall Street Journal, December 29, 2008 (pp. 1-2). Fuchs, J., “From Bailouts to Bail-ins: Will the Single-Point-of-Entry Concept End "Too Big To Fail,” Central Banker, Summer 2013. *Financial Stability Board, “Principles on Loss-absorbing and Recapitalization Capacity of G-SIBs in Resolution,” November 9, 2015 (pp.5-22). *Federal Reserve Board of Governors, “Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding Company,” Press Release, October 30. *Alexander, P., “Regulator Discord Over Resolution Proposals,” Global Risk Regulator, Vol. 12 Issue 8, September 2014 (pp.1-3) 10

Financial Stability Board, “Recovery and Resolution Planning for Systemically Important Financial Institutions: Guidance on Developing Effective Resolution Strategies,” July 16, 2013 (pp. 1-13). “The Orderly Liquidation of Lehman Brothers Holdings Inc. Under the Dodd-Frank Act,” FDIC Quarterly, Volume 5, No. 2, 2011 (pp. 1-19). Jopson, B., et al, “Bank Living Wills Reveal Wall Street Victims,” Financial Times, July 6, 2015, (pp.1-2).

Class 5 – Lender of Last Resort Wednesday, February 24 The Federal Reserve has traditionally been the lender of last resort for the financial system, primarily through the discount window. During the financial crisis, the Fed created new lending programs, for both banks and non-banks, and greatly expanded its balance sheet to inject additional liquidity into the financial market. Dodd-Frank significantly expanded the Fed’s reach as a regulator (to all Significantly Important Financial Institutions) but at the same time significantly pared back its powers to act as lender of last resort. This class will discuss the Fed’s role as lender of last resort. Guest Speaker Mr. Donald L. Kohn, Former Vice Chairman of the Board of Governors, Federal Reserve System. Donald Kohn is a 40-year veteran of the Federal Reserve System and served as vice chairman of the Board of Governors of the Federal Reserve from 2006 to 2010. He was named to serve on the advisory committee to the U.S. Treasury's new Office of Financial Research. He was also appointed by the government of the United Kingdom and the Bank of England to serve on its interim Financial Policy Committee. Kohn focuses on issues of monetary policy, financial regulation and macroeconomics. U.S. Government: Liquidity Supplier and Lender of Last Resort *Davis Polk, “Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act,” July 21, 2010 (pp. 112-113). *Carlson, M. & Wheelock, D., “The Lender of Last Resort: Lessons from the Fed’s First 100 Years,” Research Division, Federal Reserve Bank of St. Louis, Working Paper #2012-056B, February 2013 (pp. 32-43 – required, 1-32 - optional). Lacker, J., “The Fed as a Lender of Last Resort: Comments on “Rules for a Lender of Last Resort,” May 30, 2014 (pp.1-4). *Tucker, P., “The Lender of Last Resort and Modern Central Banking: Principles and Reconstruction,” Keynote Paper in “Re-thinking the Lender of Last Resort,” BIS Paper No.79, September 2014 (pp.10-12, 28-32).

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*Scott, H., “Strengthening the LLR Powers of The Fed,” Chapter 11, Connectedness and Contagion, 2015 (pp.1-10). *Scott, H., “Dodd-Frank Restrictions on the Lender of Last Resort,” Chapter 9, Connectedness and Contagion, 2015 (pp.2-20). *Wallison, P., “Dodd-Frank Makes Future Taxpayer Bailouts More Likely,” The Daily Caller, November 4, 2012 (pp. 1-2). *Hensarling, J., Letter to Ben S. Bernanke, Chairman, Federal Reserve Board of Governors, re: Docket Number R-1476, in response to the Federal Reserve’s December 23, 2013 Notice of Proposed Rulemaking and request for public comment entitled, “Extensions of Credit by Federal Reserve Banks,” January 13, 2014 (pp. 1-7). *Eavis, P., “New Fed Rule Limits Emergency Lending Power,” New York Times, November 30, 2015, (p.1-4) *Nakaso, H., “Challenging the Bagehot Rules and Revisiting the Secular Stagnation Thesis,” Symposium on Building the Financial System of the 21st Century, October 25, 2014 (pp.1-5). *Bernanke, B., “Warren-Vitter and The Lender of Last Resort,” Ben Bernanke’s Blog, Brookings, May 15, 2015. Central Bank Independence *Kohn, D. L., “Regulatory Restructuring: Balancing Fed Independence with Systemic Risk Regulation,” Statement before the Subcommittee on Domestic Monetary Policy and Technology of the Committee on Financial Services, U.S. House of Representatives, July 9, 2009 (pp. 1-13). *Thornton, J., Hubbard, G. & Scott, H., “The Fed’s Independence Is at Risk,” Financial Times, August 20, 2009 (pp. 1-2). *Kohn, D., “Federal Reserve Independence in the Aftermath of the Crisis: Should We Be Worried?,” Hutchings Center on Fiscal & Monetary Policy, January 16, 2014 (pp.1-8). *Fisher, S., “Central Bank Independence,” Remarks at 2015 Herbert Stein Memorial Lecture National Economists Club, November 4, 2015 (pp.3-17). Acharya, V., “Financial stability in the broader mandate for central banks: A political economy perspective,” Hutchins Center Working Papers, Brookings, April, 2015 (pp.2-17). *Paul, R., “Why I Plan to Grill Yellen,” TIME Magazine, October 11, 2013 (pp. 1-3). *Nicolaci Da Costa, P., “Ron Paul Legacy Lives on as House passes Fed Audit Bill,” The Wall Street Journal,” September 18, 2014 (p.1). *Konczal, M., “Here’s What’s Wrong with Rand Paul’s ‘Audit the Fed’ Bill,” Washington Post, November 16, 2013 (pp. 1-5).

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Peter, S., “Minimising Monetary Policy,” BIS Working Paper No. 330, November 2010 (p. 1-24).

Class 6 – Volcker Rule and Too Big To Fail Wednesday, March 2 Former Federal Reserve Chairman Paul Volcker has argued over the course of the past several years that commercial banks, with access to the “safety net” of deposit insurance and the Fed discount window, should be restricted from engaging in proprietary and speculative activities. This proposal, which was dubbed the “Volcker Rule”, was included in Dodd-Frank and has been implemented by a new joint-agency rule-making. However, many observers claim that distinguishing propriety trading from permissible market making, underwriting, and hedging will be complex and onerous. The U.K. has also proposed structural reforms, but instead would require retail deposit-taking institutions to be in a separate subsidiary, or ring-fenced, from investment banks with higher standalone capital requirements. This class will examine these efforts to restrict activities and their impact on the financial system. The class will also evaluate whether large, systemically important financial institutions were “too big to fail” (TBTF) during the recent financial crisis, whether they still are, and analyze the implications of TBTF for future regulatory policies. Volcker Rule *Federal Reserve, Commodities Futures Trading Commission (CFTC), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency, Securities and Exchange Commission (SEC), “Final Rules to Implement the ‘Volcker Rule’,” Fact Sheet, December 10, 2013 (pp. 1-3). *Committee on Capital Markets Regulation, “Applying the Volcker Rule,” statement issued February 18, 2014. *Volcker, P., “Prohibiting Certain High-Risk Investment Activities by Banks and Bank Holding Companies,” Testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C., February 2, 2010 (pp. 1-5). *Scott, H., “Implications of the Volcker Rules for Financial Stability,” Testimony before the Committee on Financial Services, U.S. House of Representatives, June 16, 2011 (pp. 3-7). *“Universal Banking ― Together, Forever?,” The Economist, August 18, 2012 (pp. 1-2). *Johnson, M. and Arnold, M., “Bank Traders Lose Big on AbbVie-Shire Bets,” Financial Times, December 14, 2014 (pp.1-2). Warren, E., McCain, J., Cantwell, M. and King, A., “We Need to Rein in ‘Too Big To Fail’ Banks,” CNN, July 2014 (pp.1-2). *Schacht, K., “Volcker vs. Vickers – Which Plan Is Best for Banks?,” CFA Institute, May 1, 2013 (pp. 1-3).

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Arnold, M., et al, “UK Banks Quietly Confident that They Can Cope With Ringfencing,” Financial Times, September 17, 2015 (pp.1-5). *Oliver Wyman, “The Volcker Rule Restrictions on Proprietary Trading – Implications for Market Liquidity,” February, 2012 (pp. 2-6). *Alloway, T. and MacKenzie, M., “Bonds: Anatomy of a Market Meltdown,” Financial Times, November 17, 2014 (pp.1-2). *Clifford Chance “Proposed EU Regulation On Bank Structure: Comparison of Volcker Rule and Proposed EU Ban On Proprietary Trading,” Clifford Chance Client Briefing, April, 2015 (pp.714). Elliott, D., “Market Liquidity: A Primer,” The Brookings Institution, June, 2015 (pp.5-13). Too Big To Fail (TBTF) *Bair, S. C., “We Must Resolve to End Too Big To Fail,” FDIC Quarterly, 2011, Volume 5, No. 2 (pp. 25-29). *Barth, J. & Prabha, A., “Too-Big-to-Fail: A Little Perspective on a Large Problem,” from the Fifteenth Annual International Banking Conference, Federal Reserve Bank of Chicago, Chicago, IL, November 15–16, 2012 (pp. 5-17). *Stewart, J. and Eavis, P., “Revisiting the Lehman Brothers Bailout that Never Was,” New York Times, September 29, 2014 (pp.1-5). *Wallison, P., “Breaking Up the Big Banks: Is Anybody Thinking,” American Enterprise Institute for Public Policy Research, Financial Services Outlook, August-September, 2012 (pp. 1-6). *Mayo, M., “JP Morgan Chase — Break It Up?,” CLSA Asia Pacific Markets and Credit Agricole Securities USA, September 4, 2012 (pp. 1-6). *Haldane, A., “The $100 Billion Question,” Comments delivered at the Institute of Regulation & Risk, Hong Kong, March 30, 2010 (pp. 4-6). *Brainard, L., “Dodd-Frank at Five: Assessing Progress on Too Big to Fail,” Speech, July 9, 2015 (pp.2-8,11-13). *Bipartisan Policy Center, “The Big Bank Theory: Breaking Down the Breakup Arguments,” October 2014 (pp.5-7, 19-26). *Evans, L., “Large Bank Holding Companies: Expectations of Government Support,” Testimony Before the Subcommittee on Financial Institutions and Consumer Protection, Committee on Banking, Housing and Urban Affairs, July 31, 2014 (pp.5-10). *Afonso, G., et al, “What Do Rating Agencies Think About Too Big-To-Fail Since Dodd-Frank?,” Liberty Street Economics Blog, June 29, 2015, (pp.1-3). 14

*Goodhart, C., et al, “Critical Reflections on Bank Bail-Ins,” Journal of Financial Regulation, February, 2015 (pp.12-20). *Scism, L., “Former AIG Chief Hank Greenberg Wins Moral Victory in Bailout Trial,” The Wall Street Journal, June 15, 2015 (pp.1-5). Scott, H. & Gelpern, A., International Finance: Transactions, Policy and Regulation, 20th Edition, Foundation Press, 2014 (pp.259-271). Financial Crisis Inquiry Commission, “Governmental Rescues of ‘Too Big to Fail’ Financial Institutions,” Preliminary Staff Report, August 31, 2010 (pp. 3-4). Rajan, R., “Too Systemic to Fail: Consequences, Causes and Potential Remedies,” Delivered to the Senate Banking Committee, U.S. Senate, May 6, 2009 (pp. 1-8). *Lex, “US Banks: Apocalypse Maybe,” Financial Times, December 4, 2015 (pp.1). Moore, M., et al, “Biggest Global Banks Go To Pieces Under Pressure From Regulators,” Bloomberg BNA, February 27, 2015 (pp.1-3).

Class 7 – Derivatives and Clearing Wednesday, March 9 Derivatives are financial instruments whose value is derived from some other underlying security or commodity. While some derivatives (futures and options) trade on exchanges, most trade in the largely unregulated over-the-counter (OTC) market. Since the passage of the Commodities Futures Modernization Act (CMFA) in 2000, this market has grown from a total notional value of $88 trillion in 1999 to nearly $700 trillion in 2014. Reforming the derivatives market became a significant area of focus after the financial crisis, both because of the role derivatives (credit default swaps specifically) played in the failure of AIG, and the perception that derivatives exposures at many large financial institutions increased their interconnectedness and systemic risk. This class will examine the role of derivatives in the financial system; what, if any, regulatory oversight they should be subject to; and the regulatory reforms that are underway in the U.S. and Europe. Guest Speaker Mr. Timothy G. Massad, Chairman, Commodity Futures Trading Commission Mr. Massad was sworn-in as Chairman of the CFTC on June 5, 2014. Previously, Mr. Massad was the Assistant Secretary for Financial Stability at the U.S. Department of the Treasury. In that capacity, Mr. Massad oversaw the Troubled Asset Relief Program (TARP). Prior to joining Treasury, Mr. Massad served as a legal advisor to the Congressional Oversight Panel for TARP, under the leadership of (now Sen.) Elizabeth Warren. Prior to his government service, Mr. 15

Massad was a partner in the law firm of Cravath, Swaine & Moore, LLP. Mr. Massad had a broad corporate practice with a focus on corporate finance and financial markets. He helped to draft the original standardized agreements for swaps and helped many businesses negotiate and execute transactions to hedge exposures in the derivatives markets. Mr. Massad earned his bachelor’s and law degrees at Harvard. OTC Derivatives Market Overview *Bank for International Settlements, “Table 19: Amounts Outstanding of OTC Derivatives” And “Table 20A: Amounts Outstanding of OTC Foreign Exchange Derivatives,” Derivative Statistics, December 2014 (p. 1). *U.S. Commodity Futures Trading Commission, Selected Financial Data for Futures Commission Merchants (FCMs) and Retail Foreign Exchange Dealers (RFEDs), October 31, 2014 (p.1). Derivatives Regulation *Commodities Futures Trading Commission and Securities and Exchange Commission, “Joint Report on International Swap Regulation,” January 31, 2010 (pp. 1-5, 10-14). *Financial Stability Board, “OTC Derivatives Market Reforms: Tenth Progress Report on Implementation,” November 4, 2015 (pp.1-3). *Bank for International Settlements, “Macroeconomic Impact Assessment of OTC Derivatives Regulatory Reforms,” August, 2013 (pp. 1-3, 8-14). *Committee on Capital Markets Regulation, “Global Financial Crisis: A Plan for Regulatory Reform,” May 2009 (pp. 42-50). *Stout, L., “Regulate OTC Derivatives By Deregulating Them,” Regulation, Vol. 32, No. 3, Fall 2009, (pp. 30-41). *Federal Reserve, et al, “Agencies Finalize Swap Margin Rule,” Press release, October 30, 2015 (pp.1). *Committee on Capital Markets Regulation, “Nothing But The Facts: The Swaps Pushout Rule,” Fact Statement, March 16, 2015 (pp.3). *Heltman, J., “Regulators Cut Big Banks a Break in Final Swaps Rule,” American Banker, October 22, 2015 (pp.1-3). Ernst & Young, “Dodd-Frank's Title VII: OTC Derivatives Reform,” 2013 (pp. 1-6). Financial Stability Board, “Jurisdictions’ Ability to Defer to Each Other’s OTC Derivatives Market Regulatory Regimes,” FSB Report to G20 Finance Ministers and Central Bank Governors, September 18, 2014 (pp.1-7). Clearing Houses

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*Pirrong, C., “The Economics of Central Clearing: Theory and Practice,” International Swaps and Derivatives Association Discussion Papers Series, No. 1 – May 2011 (pp. 5-17). *Cecchetti, S., Gyntelberg, J. & Hollanders, M., “Central Counterparties for Over-The-Counter Derivatives,” BIS Quarterly Review, September 2009 (pp. 45-58). *U.S. Department of the Treasury, “FSOC Makes First Designations in Effort to Protect Against Financial Crises,” Press Release, July 18, 2012 (pp. 1-2). *Duffie, D., Li, A. & Lubke, T., “Policy Perspectives on OTC Derivatives Market Infrastructure,” Federal Reserve Bank of New York Staff Report No. 424, March 2010 (pp. 1-9). *Mitting, W., “OTC Clearing III: How Many CCPs Will There Be and How Can They Compete?,” Futures & Options World, April 30, 2012 (pp. 1-2). *Cohn, G., “Clearing Houses Reduce Risk, They Do Not Eliminate It,” Financial Times, June 22, 2015 (pp.1-2). *Committee on Capital Markets Regulation & The Financial Markets Law Committee, “Resolving Issues of Legal Uncertainty Relating to the Recognition and Supervision of Central Counterparties,” Comment paper, September, 2015, (pp.1-6). *Burne, K., “Large Banks Backing New Safeguards in Short-Term Lending Markets,” The Wall Street Journal, October 9, 2014 (pp.1-2). *Blackrock, “Central Clearing Counterparties and Too Big To Fail,” April 2014 (pp.1-5). *Bank of International Settlements, “Recovery of financial market infrastructures,” October 2014 (pp.1-2). *Stafford, P., “Clearing Houses May Face New Capital Rules,” Financial Times, November 24, 2014 (pp.1-2). Tucker, P., “Are Clearing Houses the New Central Banks,” Over-the-Counter Derivatives Symposium, Chicago, April 11, 2014 (pp.1-12). Class 8 – GSE Reform Wednesday, March 23 Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that were created by Congress to increase liquidity in primary and secondary mortgage markets as well as to supply capital for residential housing loans. Over time, the marketplace inferred an implicit government guarantee on GSE securities, providing these agencies with a lower cost of capital relative to other financial institutions. Because of this funding advantage, the GSEs grew dramatically in size to become some of the largest financial institutions in the world. The market expectation of a government guarantee proved mostly correct when the institutions were placed into conservatorship in early September 2008; their debt was in effect guaranteed by the government, although both the preferred and common equity were not. The issue is now what to do with these two giant mortgage institutions under direct government control, 17

including how to use them to help ameliorate the foreclosure crisis, how to recoup taxpayer assistance, and since the Dodd-Frank Act did not touch on these institutions, how to reform them as part of a greater goal of redesigning the U.S. system of housing finance. The issue of reform of the GSEs is the most polarizing and unresolved problem from the financial crisis and will be a fiercely fought political battle in the coming years. We will discuss Fannie and Freddie before the crisis, how the financial crisis affected them and the decision to place them into conservatorship, what has occurred while they are under conservatorship and their current regulation, and finally, some of the proposals for GSE reform and the future of housing finance in the U.S. Guest Speakers Mr. E. L. Golding, Principal Deputy Assistant Secretary, Office of Housing, HUD and former Senior Vice President, Freddie Mac, and Bio: Edward L. Golding joined Freddie Mac in 1989 and held a number of senior research and policy positions, including Senior Vice President of Economics and Policy, and Program Executive of Making Home Affordable. At Freddie Mac, Mr. Golding has been responsible for overseeing regulatory capital compliance, analysis of the mortgage market, capital management and economic and policy analysis of issues affecting Freddie Mac. He also helped implement the risk-based capital rules under which Freddie Mac operates. Mr. Golding has significant experience in government and academia, including experience as a special assistant to the Board member at the Federal Home Loan Bank Board, an economist with the Federal Trade Commission and as an assistant professor at the University of Florida and the Wharton School of the University of Pennsylvania.

Fannie and Freddie Pre-Crisis *Financial Crisis Inquiry Commission, “Government Sponsored Enterprises and the Financial Crisis,” Preliminary Staff Report, April 7, 2010 (pp. 1-22). Acharya, V., Richardson, M. & van Nieuwerburgh, S., Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance, Princeton University Press, January 2011 (pp. 88100). Financial Crisis, Insolvency and Conservatorship *Financial Crisis Inquiry Commission, “Government Sponsored Enterprises and the Financial Crisis,” Preliminary Staff Report, April 7, 2010 (pp. 22-28). *Wallison, P. & Pinto, E., “Worse Than You Think: What Went Wrong at Fannie and Freddie And What Still Might,” American Enterprise Institute, November 3, 2008 (pp. 1-4). *Isaac, W., “Playing Semantic Games With Fannie and Freddie Investors,” The Wall Street Journal, July 6, 2014 (pp.1-2). *Calabria, M., “The Future of Fannie And Freddie,” Panel Contribution at Brooklyn Law School, April, 2015 (pp. 354-356). 18

*Wallison, Peter, “Hidden in Plain Sight: A Q&A with Peter Wallison on the 2008 Financial Crisis and Why It Might Happen Again,” American Enterprise Institute, January 13, 2015. *Hoskins, S., “Freddie Mac Announces Quarterly Loss, Does Not Require Additional Treasury Assistance,” Congressional Research Service Report, November 6, 2015 (pp.4). Future of GSEs and GSE Regulation *Millstein, J., “A Blueprint for Housing Finance Reform in America,” Remarks at the Woodrow Wilson International Center for Scholars, Program on America and the Global Economy: Are We Becoming a Nation of Renters?, May 22, 2012 (pp. 1-14). *Zandi, M. & deRitis, C., “The Road to Reform,” Moody’s Analytics, Sept., 2013 (pp. 1-11). *Bipartisan Policy Center, “Housing America’s Future: New Directions for National Policy,” Economic Policy Program (Housing Commission), February, 2013 (pp. 5-13). *Wallison, P., “The Dead Shall Be Raised: The Future of Fannie and Freddie,” American Enterprise Institute for Public Policy, Financial Services Outlook, January –February 2010 (pp. 1-8). *U.S. Department of the Treasury and the U.S. Department of Housing & Development, “Reforming America's Housing Finance Market: A Report to Congress,” Feb. 2011 (pp. 23-30). *Levitin, A., “Housing Finance Reform: Should There Be a Government Guarantee?,” Testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, September 13, 2011 (pp. 1-9). Haldeman, E., “Fannie & Freddie: Where They've Been, What to Do With Them,” October 18, 2012 (pp. 1-12). U.S. Senate Committee on Banking, Housing, & Urban Affairs, “Senate Banking Committee Passes Bipartisan Finance Reform Legislation,” Press release, May 15, 2014. Needham, V., “Warren, Warner Urge Action on Housing Finance Reform,” The Hill, November 18, 2014 (pp.1-2). *Scharfstein, D. & Sunderam, A., “Perspectives on Housing Finance Reform,” December 5, 2013 (pp. 1-2). *Wallison, P., “Hidden in Plain Sight: A Q&A with Peter Wallison on the 2008 financial crisis and why it might happen again,” AEI interview, January 13, 2015 (pp.1-6). Center for American Progress, “A Responsible Secondary Market System for Housing Finance,” Prepared by the Mortgage Finance Working Group, January 2011 (pp. 1-14). Kling, A., “Two Approaches to GSE Reform,” Mercatus Center, George Mason University, Working Paper No. 11-07, March 2011 (pp. 1-11). 19

Zandi, M., “Public Proposals for the Future of the Housing Finance System,” Testimony before the Senate Banking Committee, U.S. Senate, March 29, 2011 (pp. 1-6). Sanders, A., “Housing Finance Reform: Continuation of the 30-Year Fixed Rate Mortgage,” Testimony before the Senate Banking Committee, U.S. Senate, October 20, 2011 (pp. 1-8). Class 9 – Money Market Funds and Shadow Banking Wednesday, March 30 The Shadow Banking System, which includes non-bank financial institutions that provide many of the services of banks but are not directly regulated as banks, is viewed by many as contributing importantly to the 2007-08 financial crisis. Prominent Shadow Banking institutions include investment banks, special investment vehicles (generally affiliates subsidiaries of banks) insurance companies, hedge funds and money market funds. Dodd-Frank empowers the Financial Stability Oversight Council (FSOC) to extend bank regulatory oversight to selected Shadow Bank institutions that are “systemically important” to financial market stability (SIFIs). Three insurance companies have been designated as SIFIs and FSOC has considered designation of certain asset management companies as SIFIs. The SEC has recently adopted new rules to address risks of investor runs in money market funds. The class will focus on the threats to financial stability posed by the Shadow Banking System and regulatory policies to deal with these threats. Guest Speaker Mr. David S. Scharfstein, Edmund Cogswell Converse Professor of Finance and Banking, Harvard Business School. David S. Scharfstein is the Edmund Cogswell Converse Professor of Finance and Banking at Harvard Business School. His research focuses on banking, financial distress, risk management, housing finance, venture capital and corporate investment. He teaches the introductory finance course in the MBA program and the Ph.D. corporate finance course. Previously, he has taught courses on private equity and venture capital. Regulation of Money Market Funds *Securities Exchange Commission, “SEC Adopts Money Market Fund Reform Rules,” Press release, July 23, 2014 (pp.1-8). Taub, J., “Post-Lehman, Money Market Fund Protections Still Weak,” The New York Times, September 17, 2014 (pp.-1-3). Burne, K., “BlackRock to Shift Funds to Comply With New Rules,” The Wall Street Journal, April 7, 2015 (pp.1-3) *Scott, H., “Money Market Mutual Fund Reform,” Chapter 19, Connectedness and Contagion, 2015 (pp.1-11).. Macey, J., “Reducing Systemic Risk: The Role of Money Market Mutual Funds as Substitutes for Federally Insured Bank Deposits,” Yale Law & Economics Research Paper No. 422, January 4, 2011 (pp. 1-10). 20

*President’s Working Group on Financial Markets, “Money Market Fund Reform Options,” October, 2010 (pp. 1-6 – required, 7-35 – optional). *Scharfstein, D., “Perspectives on Money Market Mutual Fund Reforms,” Testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C., June 21, 2012 (pp. 1-12). Shadow Banking System *Tarullo, D., “Thinking Critically about Nonbank Financial Intermediation,” Remarks at the Brookings Institution, Washington , D.C., November 17, 2015 (pp.1-14). Financial Stability Board, “Transforming Shadow Banking into Resilient Market-based Financing,” November 14, 2014 (pp. 1-9). Carney, M., “Taking Shadow Banking Out of the Shadows to Create Sustainable Market-Based Finance,” Financial Times, June 16, 2014 (pp.1-3). *Blackrock, “Who Owns the Assets? Developing a Better Understanding of the Flow of Assets and the Implications for Financial Regulation,” Viewpoint, May 2014 (pp.1-13). *Elliott, D., “Designating Systemically Important Financial Institutions: Balancing Costs and Benefit,” Testimony before the House Financial Services Subcommittee, May 16, 2012 (pp.1-4). Financial Stability Board, “Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions,” 2nd Consultative Document, March 4, 2015 (pp.47-55). *Jopson, B., et al, “Fund Managers To Escape ‘Systemic’ Label,” Financial Times, July 14, 2015 (pp.1-2) *Office of Financial Research, “Asset Management and Financial Stability,” September 2013 (pp.1-2, 9-12 – required, 12-23 – optional). *Wallison, P., “Unrisky Business: Asset Management Cannot Create Systemic Risk,” American Enterprise Institute, January 2014 (pp.1-7). BlackRock, “Notice Seeking Comment On Asset Management Products and Activities,” Filing to The Financial Stability Oversight Council, March 25, 2015 (pp.4-14). *Haldane, A., “The Age of Asset Management?” Speech at the London Business School, April 4, 2014 (pp.1-14). Reid, B., “The Age of Asset Management,” Investment Company Institute (ICI), July 24, 2014 (pp.1-3).

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*Committee on Capital Markets Regulation, Comment letter on Consultative Document of Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions, May 29, 2015 (pp.1-6). Koijen, R. and Yogo, M., “Growing Risk in the Insurance Sector”, Federal Reserve Bank of Minneapolis, Economic Policy Paper 14-2 (pp.1-6). *Financial Stability Oversight Council, “Basis for FSOC’s Final Determination Regarding Prudential Financial, Inc.,” September 19, 2013 (pp. 1-6). *Wallison, P., “MetLife Calls The Regulator’s Bluff,” Wall Street Journal, July 7, 2015 (pp.1-2). Financial Crisis Inquiry Commission, “Shadow Banking and the Financial Crisis,” Preliminary Staff Report, May 4, 2010 (p. 1-41). *Willmer, S., “Federated, Blackrock Mull Private Money Funds Amid Rules” March 15, 2015 (pp.1-3).

Class 10 – Market Structure: Dark Pools, High Frequency Trading, Decimalization Wednesday, April 6 In 2005 the SEC put in place Regulation NMS (National Market System) with the major focus on enhancing competition among market makers and exchanges through lowering barriers to entry. The regulation succeeded in spawning a host of new institutions (electronic exchanges, trading platforms, dark pools) and trading practices, such as computerized high speed trading. The consequence of these changes has been increased competition, with the attendant benefits of reduced transaction costs, but this has been accompanied by dramatic fragmentation of market trading among competing execution venues. Further, the lowered transaction costs have encouraged the development of computerized trading systems, including “high frequency trading systems,” that have greatly expanded transaction volume. Some believe that the consequences of these changes have been reduced transparency of transactions and periods of dramatic price instability (the “Flash Crash” of May 2010). This class will focus on the evolution of market trading structure and practices, the implications for market stability, and the need for reforms of the rules that shape trading market structure. Guest Speaker Derrick Chan, SVP, Fidelity Centralized Electronic Trading Derrick joined Fidelity in 2003 and has served in a variety of roles within Fidelity Capital Markets (FCM) Equities Division, including institutional agency trading, market making, market structure, and electronic trading where he led the product development and financial engineering efforts for Fidelity’s CrossStream ATS (Dark pool), smart order routing, algorithmic trading suite, co-location infrastructure and transaction cost analytics. He currently leads the Fidelity Centralized Electronic Trading (FCET) group responsible for FCM’s multi-asset electronic trading product suite and trading research, including algorithmic trading, liquidity management, risk management, decision support, and quantitative analytics. Derrick graduated from the Massachusetts Institute of Technology with degrees in Electrical Engineering & Computer Science, Management Science, and received an MBA from the Sloan School of 22

Management. He holds Series 7, 24, 55 & 63 registrations and is a member of the SIFMA Equity Markets & Trading Committee. Overview – Market Structure *White, M., “Enhancing Our Equity Market Structure,” Sandler O’Neil & Partners, L.P. Global Exchange and Brokerage Conference, New York, June 5, 2014 (pp.1-8). Dark Pools *Shorter, G., et al, “Dark Pools in Equity Trading: Policy Concerns and Recent Developments,” Congressional Research Service, September 2014 (pp.1-13) *Securities and Exchange Commission, “Strengthening the Regulation of Dark Pools,” Fact Sheet from the SEC Open Meeting, October 21, 2009 (pp. 1-3). *Hatch, R., “Putting the Spotlight on the SEC's Regulatory Proposal Concerning Dark Pools,” George Washington Law Review, Volume 78, No. 5, July 2010 (pp. 1043-1050). *Hope, B. and Patterson, S., “NYSE Plan Would Revamp Trading,” The Wall Street Journal, December 17, 2014 (pp.1-3). K. Geiger, “Credit Suisse Said Nearing $80 Million Dark Pool Settlement,” Bloomberg Business, September 14, 2015 (pp. 1-3). High Frequency Trading * Committee on Capital Markets Regulation, “What is High Frequency Trading?,” December 29, 2014 (pp. 1-9). *McGowan, M., “The Rise of Computerized High Frequency Trading: Use and Controversy,” Duke Law and Technology Review, No. 16, 2010 (pp. 20-24). *O’Hara, M., “High Frequency Market Microstructure,” April 2015, (pp.17-31) *Hauptman, M., “Computerized Trading ― What Should the Rules of the Road Be?” Testimony before the Subcommittee on Securities, Insurance, and Investment of the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, September 20, 2012 (pp. 1-11). *Scott, H., Testimony before the Subcommittee on Securities, Insurance, and Investment Committee on Banking, Housing, and Urban Affairs, U.S. Senate, June 18, 2014 (pp.3-17). Popper, N., “Plan for New Stock Exchange Stirs Furious Debate,” New York Times, Nov. 16, 2015 (pp. 1-4). Brogaard, J., Riordan, R., Shkilko, A. and Sokolov, K., “High-Frequency Trading and Extreme Price Movements,” November 2014 (pp.1-5).

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Ziliak, Z., “Regulation Ahead: Advice and Options for Automated Frequency Traders,” Bloomberg Law Reports, 2013 (pp. 1-8). Lewis, M., “The Wolf Hunters of Wall Street,” The New York Times, March 31, 2014 (pp.1-24). Harris, L., “A Market Structure Agenda for the SEC,” CNBC, April 3, 2014 (pp.1-2). *P. Henning, “Why High-Frequency Trading Is So Hard to Regulate,” New York Times, October 20, 2015 (pp. 1-4). Lynch, S., “New York High-Speed Trading Firm Settles SEC Charges over Manipulation,” Reuters, October 16, 2014 (p. 1). Decimalization *Securities and Exchange Commission, “Report to Congress on Decimalization,” July 2012 (pp. 1-23).

Grant Thornton, “The JOBS Act ― Next Steps for Success,” Public Policy Perspective, May, 2012 (pp. 1-4). *Securities and Exchange Commission, “SEC announces Pilot Plan to Assess Stock Market Tick Size Impact for Smaller Companies,” Press Release, August 26, 2014 (p.1). *A. Ackerman, “SEC Finalizes ‘Tick Size’ Pilot for Smaller-Company Stock,” Wall Street Journal, May 6, 2015 (pp.1-3). *Equity Capital Formation Task Force, “From the On-Ramp to the Freeway: Refueling Job Creation and Growth by Reconnecting Investors with Small Cap Companies,” Report issued November 11, 2013 (pp. 1-3). Class 11 – Cost Benefit Analysis Wednesday, April 13 Cost-Benefit analysis is generally included in a list of characteristics of effective regulation – whether the benefits of regulatory intervention outweigh the costs. Such analysis has been enshrined by Executive Order since the 1980s in the analysis of regulations proposed by agencies of the Executive Branch in the U.S. For many years, the independent agencies, not covered by the Executive Order, paid manly lip-service to Cost-Benefit analysis. But in the late 1990s, Congressional legislation required the SEC to perform such analysis, although the requirement attracted little attention at the time. In the last several years, federal court decisions have mandated that the CFTC and SEC conduct a serious Cost-Benefit analysis of newly proposed rules. The class will discuss the challenges to execute Cost-Benefit analysis. Cost-Benefit Analysis

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*Committee on Capital Markets Regulation, “A Balanced Approach to Cost-Benefit Analysis Reform,” October 1, 2013 (pp. 1-19). *Committee on Capital Markets Regulation, “CCMR Warns that Inadequate Cost-Benefit Analysis Opens Dodd-Frank Regulation to Challenge and Delay,” March 7, 2012 (pp. 1-6). *Rose, P. & Walker, C., “The Importance of Cost-Benefit Analysis in Financial Regulation,” Center for Capital Markets Competitiveness, March 2013 (pp. v.-24). *Rose, P. & Walker, C., “Dodd-Frank Regulators, Cost-Benefit Analysis, and Agency Capture,” Stanford Law Review Online, Volume 66, No. 9, April 2013 (pp. 9-16). *Tett, G., “Beware the Hegelian Touch of Regulatory Hubris,” Financial Times, September 14, 2011 (pp. 1-2). *Kess, A. and Cohn, Y., “Playing the Dodd-Frank Shaming Game,” The Wall Street Journal, December 2, 2014 (pp.1-2). *Blinder, A., “Financial Entropy and the Optimality of Over-Regulation,” the 17th Annual International Banking Conference, November 6, 2014 (pp.17-21). *Levitt, A., “Don’t Gut the S.E.C.,” New York Times, August 7, 2011 (pp. 1-2). *Sloan, S., “Cost-Benefit Analysis Puts the Brakes on Dodd-Frank,” Bloomberg, May 7, 2012 (pp. 1-4). *Tett, G., “Regulatory Revenge Risks Scaring Investors Away,” Financial Times, August 28, 2014 (pp.1-2). *Coates, J., “Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications,” Draft: January 4, 2014 (pp. 2-5, 85-96). Posner, E. and Weyl, G., “Cost-Benefit Analysis of Financial Regulations: A Response to Criticisms,” Coase-Sandor Institute for Law and Economics Working Paper No. 683, University of Chicago Law School, May 2014, pp.1-13. Elliott, D., Salloy, S. & Oliveira Santos, A., “Assessing the Cost of Financial Regulation,” IMF Working Paper, #12/233, September 2012 (p. 4-19, 67-68). Min, D., “The Costs of Implementing the Dodd-Frank Act: Budgetary and Economic,” Testimony before Subcommittee on Oversight and Investigations of the House Financial Services Committee, U.S. House of Representatives, March 30, 2011 (pp. 1-7). Overdahl, J., “Economic Analysis in the Federal Rule-Making Process to Implement Dodd Frank,” NERA Economic Consulting, Insights Series, August 30, 2010 (pp. 1-5). *Cochrane, J., “Challenges for Cost-Benefit Analysis of Financial Regulation,” August 2014 (pp.23-31).

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Commodity Futures Trading Commission, “Initial Response to District Court Order in Securities Industry and Financial Markets Association v. CFTC,” March 10, 2015 (pp.1-4).

Class 12 – Regulatory Structure Wednesday, April 20 This class focuses on the structure of the U.S. financial regulatory system, which is the most fragmented and complex of all developed economies. There are competing regulators at the federal, state and private (“self-regulatory organizations”) levels, as well as competition among regulators at the various levels. The 2010 Dodd-Frank Act did very little to reduce this regulatory fragmentation, eliminating only one regulator and adding several additional new regulatory bodies, such as FSOC, to an already complicated system. We will start from the Treasury Blueprint issued in 2008, compare it with other alternatives also not adopted, compare it with what was incorporated into the Dodd-Frank legislation and ask why Congress made the choices it did. We will then move on to discuss what improvements could be made and public policy that might move us there. Review Readings *Murphy, E., “Who Regulates Whom and How? Overview of the U.S. Financial Regulatory Policy,” Cornell University ILR School, May 28, 2013 Summary & pp. 1-14. *DiGiorgio, G., DiNoia, C. & Piatti, L., “Financial Market Regulation: The Case of Italy and a Proposal for the Euro Area,” Wharton Financial Institutions Center, June 2000 (pp. 3-10). Regulatory Structure *Department of the Treasury, “Blueprint for a Modernized Financial Regulatory Structure,” March, 2008 (pp. 1-22). *Committee on Capital Markets Regulation, “Recommendations for Reorganizing U.S. Regulatory Structure,” January 14, 2009 (pp. 1-10). *Taylor, M., “The Road From "Twin Peaks" ― And The Way Back,” Connecticut Insurance Law Journal, Volume 16:1, 2009 (pp. 61-65,75-95). *U.S. Government Accountability Office, “Financial Stability Oversight Council: Status of Efforts to Improve Transparency, Accountability, and Collaboration,” September 16, 2014 (p.1). *The Volcker Alliance, “Reshaping The Financial Regulatory System,” April, 2015 (pp.12-28 required, 29-37 optional). *U.S. Government Accountability Office, “Regulators Have Faced Challenges Finalizing Key Reforms and Unaddressed Areas Pose Potential Risks,” Report to Congressional Addressees, January 2013 (pp. 1-2). *Norris, F., Independent Agencies, Sometimes in Name Only, New York Times, August 8, 2013 (pp. 1-3).

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*Hilsenrath, J., “Washington Strips New York Fed’s Power,” The Wall Street Journal, March 4, 2015 (pp.1-8). *Clifford Chance, “A Brief Overview of the Financial Services Act 2012 and the New UK Financial Regulation Framework,” Briefing Note, March 2013 (pp. 1-4). *Blackwell, R., “The Bank Regulatory System’s a Nightmare, and It’s Not Going to Change,” American Banker, August 5, 2014 (pp.1-4). U.S. Treasury Department, “Financial Regulatory Reform - A New Foundation: Rebuilding Financial Supervision and Regulation,” June, 2009 (pp. 1-9). Scott, H., “The Reduction of Systemic Risk in the United States Financial System,” Harvard Journal of Law and Public Policy, Volume 33, No. 22, 2010 (pp. 726-734). Bipartisan Policy Center, “Dodd-Frank’s Missed Opportunity: A Road Map for a More Effective Regulatory Architecture,” April 2014 (pp.5-10). Pinschmidt, P., “Testimony before the House Financial Services Subcommittee on Oversight and Investigations,” 17 September 2014 (pp.1-5). Piwowar, S., “Remarks at AEI Conference on Financial Stability,” July 15, 2014 (pp1-4). *Gallagher, D., “The Securities and Exchange Commission – The Next 80 Years,” The 15th Annual A.A. Sommer Jr Lecture on Corporate, Securities and Financial Law, October 16, 2014 (pp.1-5). *Tucker, P., “Regulatory Reform, Stability and Central Banking,” Hutchins Center on Fiscal & Monetary Policy, Brookings, January 16, 2014 (pp.13-17).

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