Q1 GDP Slows to 1.8%

On Thursday, the Bureau of Economic Analysis announced that the U.S. GDP growth rate in the first quarter of 2011 slowed to an annual rate of 1.8 percent, compared to a rate of 3.1 percent in fourth quarter 2010 and 3.7 percent in first quarter 2010. The Bureau cited a combination of lower-than-expected economic data, global energy uncertainty, and concerns about the budget deficit as causes of the growth rate decelerating.

Bernanke Announces Rates to Stay at Near Zero, Ends Bond Buying Program

On Wednesday, Federal Reserve Chairman Ben Bernanke held his first quarterly press conference in which he said that the economy and job market are improving moderately, but the housing market and other factors such as gas prices continue to be a drag on growth. He announced that the Fed plans to end the $600 billion treasury bond-buying program in June and will leave interest rates at their current levels. The event followed a two-day meeting of the Fed’s policymaking committee at which the central bank indicated continuity in its strategy. The Fed’s bond buying program known as the second round of quantitative easing, or “QE2,” will expire as scheduled at the end of June. The Fed also maintained its near-zero target for short-term interest rates, where it has been since December 2008, and indicated that it expects to keep rates “exceptionally low” for “an extended period.”

Debt Ceiling Vote

The vote to increase the U.S. government’s borrowing ceiling beyond the current limit of $14 trillion has become the hot topic in Congress. While the Treasury Department’s original estimate was that the ceiling would need to be raised by mid-May, the Department is now saying it could hold out till July but would need to take extraordinary measures. While the measure is expected to easily pass the Senate, the question remains whether the House can pass such a bill. House Speaker John Boehner (R-OH) said this week that he will not guarantee a vote on bill to raise the debt limit, much less passage of such a bill, without cuts in discretionary spending and alterations of entitlements such as Medicare and Medicaid. Congress returns next week from its two week recess, and House Republicans plan to hold a series of meetings to gather feedback from their Members about the debt ceiling.

CFTC and SEC Announce Joint Rules on Derivatives/Swaps

On Wednesday, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) unveiled a 300-page proposed rule that would regulate swaps and derivatives under the Dodd-Frank Wall Street Reform Act. Both agencies voted to issue the proposal and seek comment jointly. While the SEC acted unanimously, Republican CFTC Commissioner Jill Sommers opposed the proposed rule. The CFTC also proposed rules setting new capital requirements for swap dealers and major swap participants; new minimum requirements for how futures merchants have to keep and protect customers’ collateral for swaps deals; and a rule that requires dealers to make audio recordings of transactions. One part of the rules would force clearinghouses to maintain “total legal separation” of customer’s collateral, preventing them from seizing the collateral of one trader to cover the margin losses of another. The regulators’ proposal divides swaps into three general categories. Those that are securities-based would be regulated by the SEC. Those not securities-based would be regulated by the CFTC. The third category, combinations of securities and non-securities, will have a legal process to determine which agency regulates them. The proposal does include an exclusion for a number of transactions that might be viewed as swaps such as insurance contracts and consumer-related activities such as contracts for home heating oil and mortgage rate locks. Additionally, the CFTC also proposed a minimum capital requirement of $20 million for swap dealers and major swap participants. The agencies expect to finalize the rule this summer.

Treasury Issues Proposed Exemption of Foreign Exchange Swaps

On Friday, the Treasury Department issued a proposed exemption for foreign exchange swaps and forwards from most of the derivatives rules required under the Dodd-Frank Act. Under Dodd-Frank, foreign exchange swaps and forwards are subject to the same clearing and trading rules as other swaps, unless the Treasury secretary provides an exemption. Now that the Treasury Department has exercised this exemption authority, the proposal is released for 30 days of public comment before being finalized.

More Information

If you have any questions regarding any of these issues, please contact:

Matt Jessee, Policy Advisor
matt.jessee@bryancave.com
1 314 259 2463