“-Central clearing interposes a regulated clearinghouse between the original counterparties in a derivatives transaction and so creates an opportunity to make dealing more transparent.”-
Tag Archives: US Treasury
– Text of Draft Proposal + NYT explainer
– Conrad Black’-s take on the financial meltdown
– Takes from 3 economists
– More links here. More links, again.
– UPDATE: Paul Krugman says the plan does not address the real problem.
– UPDATE: More Krugman
Some are saying that we should simply trust Mr. Paulson, because he’s a smart guy who knows what he’s doing. But that’s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr. Paulson repeatedly declared the financial crisis “contained,” and then offered a series of unsuccessful fixes — justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us.
Details on how the Federal Reserve will TRY to crash real-money prediction exchanges InTrade-TradeSports and MatchBook
Via Betting Market, the Federal Reserve:
Louise L. Roseman, Director, Division of Reserve Bank Operations and Payment Systems
Before the Subcommittee on Domestic and International Monetary Policy, Trade, and Technology, Committee on Financial Services, U.S. House of Representatives
April 2, 2008
Chairman Gutierrez, Ranking Member Paul, and members of the Subcommittee, I am pleased to appear before you to discuss the implementation of the Unlawful Internet Gambling Enforcement Act of 2006. I will provide an overview of the Act and of the proposed rule to implement the Act that the Federal Reserve Board and the Secretary of the Treasury (the Agencies) published for comment. I will also highlight the major issues raised in the comments we received.
Unlawful Internet Gambling Enforcement Act of 2006
The Act prohibits gambling businesses from accepting payments in connection with unlawful Internet gambling. Such payments are termed “-restricted transactions.”- The Act also requires the Board and the Secretary of Treasury, in consultation with the Attorney General, to prescribe regulations requiring designated payment systems and their participants to establish policies and procedures reasonably designed to identify and block or otherwise prevent or prohibit the acceptance of restricted transactions.
The Act does not spell out which gambling activities are lawful and which are unlawful, but rather relies on the underlying substantive Federal and State laws. The Act does, however, exclude certain intrastate and intratribal wagers from the definition of “-unlawful Internet gambling,”- and also excludes any activity that is allowed under the Interstate Horseracing Act of 1978. The activities that are permissible under the various Federal and State gambling laws are not well-settled and can be subject to varying interpretations. Congress recognized this fact when it included in the Act a “-sense of Congress”- provision that states that the Interstate Horseracing Act exclusion “-is not intended to resolve any existing disagreements over how to interpret the relationship between the Interstate Horseracing Act and other Federal statutes.”-
The Act directs the Agencies to designate payment systems that could be used to facilitate restricted transactions. A designated payment system and its participants must comply with the rule. Congress recognized, however, that it may be difficult to block restricted transactions made in certain payment systems, and directed the Agencies to exempt transactions or designated payment systems from the rule’-s requirements in those cases where it is not reasonably practical to block restricted transactions. By including this requirement, Congress recognized the importance of an efficient payment system to a well-functioning economy and of ensuring that the Agencies’- rule does not have a material adverse effect on payment system efficiency. In addition, the Act requires that the regulations identify the types of policies and procedures, including non-exclusive examples, that the Agencies would deem reasonably designed to prevent or prohibit restricted transactions. The Act also requires the Agencies to ensure that their regulations do not block or otherwise prevent or prohibit transactions related to activity that is explicitly excluded from the definition of unlawful Internet gambling.
The Proposed Rule and Comments Received
Overview of the proposed rule. Over the course of this rulemaking, the Agencies have done a considerable amount of outreach to payment system representatives, gaming interests, Federal and State regulators, and others. These consultations enabled the Agencies to gain a better understanding of gaming and its regulatory structure, and the role the various payment systems play in facilitating gaming. Although Board staff is quite familiar with the operations of many types of payment systems, this consultation provided a deeper understanding of certain payment systems, such as money transmitting businesses (for example, Western Union, MoneyGram, and PayPal), and allowed the Agencies to better focus on formulating options for policies and procedures that would be practical for those systems to comply with the Act.
In October 2007, the Agencies published for comment a proposed rule to implement the Act. The proposed rule (1) designates payment systems that could be used by participants in connection with a restricted transaction, (2) exempts certain participants in certain designated payment systems from the requirements of the regulation, and (3) requires non-exempt participants to establish and implement policies and procedures reasonably designed to prevent or prohibit restricted transactions.
For each designated payment system, the proposed rule sets out non-exclusive examples of policies and procedures for non-exempt participants in the system that the Agencies believe are reasonably designed to prevent or prohibit restricted transactions. These examples are tailored to the particular roles participants play in each payment system. The examples include policies and procedures that address methods for conducting due diligence in establishing and maintaining a customer relationship designed to ensure that the customer does not originate or receive restricted transactions through the customer relationship. The examples also include policies and procedures that address remedial actions with respect to a customer if the participant becomes aware that the customer has originated or received restricted transactions through the customer relationship. Examples applicable to card systems and money transmitting businesses include procedures to address ongoing monitoring or testing to detect possible restricted transactions and, in the case of card systems, establishing transaction codes and merchant category codes that enable the card system or card issuer to identify and deny authorization for a restricted transaction.
More than 200 organizations and consumers submitted comments on the proposal. Many of the comments were directed toward the Act itself. Most consumers who commented indicated that the Act represents an inappropriate governmental intrusion into citizens’- private affairs. Other commenters expressed concern that the Act will exacerbate the U.S.’-s difficulties with the World Trade Organization related to Internet gambling. Some banks warned that the cumulative effect of the increased compliance burden of this and other laws will adversely affect the competitiveness of the U.S. payment system. In contrast, some commenters supported the Act’-s goals, noting the problems that Internet gambling causes for individuals who gamble beyond their means.
I will now highlight certain aspects of the proposed rule and the associated comments that the Agencies received.
Determination of what constitutes unlawful Internet gambling. Like the Act, the proposed rule did not specify what constitutes unlawful Internet gambling. Lack of clarity on this topic in both the Act and the proposed regulation was the most prominent concern raised by the commenters. Commenters that represent payment systems and their participants stressed that uncertainty about what constitutes unlawful Internet gambling would make compliance with the rule very difficult and burdensome. Commenters generally supported bright-line mechanisms for determining which transactions they should block. Clarity on this point would permit them to design policies and procedures that they could be assured would meet the rule’-s requirements. A number of commenters recommended that the Agencies develop a list of gambling businesses whose transactions should be blocked. While some of these commenters acknowledged the limited effectiveness of such a list, they desired the certainty and efficiency that it would provide. Other commenters suggested that the rule should place the onus on the Internet gambling business to demonstrate to its bank the legality of its transactions. Still others, including some gambling businesses and many consumers, asked that the rule clarify that certain types of gambling, such as pari-mutuel betting or poker, are lawful.
Designated payment systems. The Agencies proposed designating a broad range of payment systems that could be used in connection with Internet gambling. Designated payment systems include automated clearinghouse (ACH) systems, card systems (including credit card, debit card, and prepaid or stored-value systems), check collection systems, money transmitting businesses, and wire transfer systems (such as Fedwire and CHIPS). Commenters generally concurred with the scope of the payment system designations.
Exemptions. The Agencies considered instances when it would not be reasonably practical to identify and block, or otherwise prevent or prohibit, restricted transactions. The proposed rule did not exempt from compliance any designated payment system in its entirety, but rather exempted certain participants in the ACH, check collection, and wire transfer systems. With respect to domestic transactions, the proposed rule exempts all participants in these systems except for a participant that would have a customer relationship with an Internet gambling business. The institution that has the customer relationship with that business is in the best position to determine the nature of the customer’s business and whether the customer is likely to receive restricted transactions for credit to its account. The Agencies believe it is not reasonably practical for other parties to transactions in these systems to identify restricted transactions because these systems do not have the functional capabilities in place for identifying and blocking payments made for specific purposes or initiated in specific ways, such as on the Internet. For that reason, some banks recommended that these systems be exempt from the rule altogether. The proposed rule did not include exemptions for any participant in a card system or money transmitting business– rather, the Agencies tailored the examples of policies and procedures to the functional capabilities of those systems and their participants.
Due diligence. As I noted earlier, the proposed rule contained examples of policies and procedures that would comply with the rule. Those examples included procedures to conduct due diligence in establishing and maintaining commercial customer relationships to ensure that commercial customers do not originate or receive restricted transactions. Bank commenters generally believed that such due diligence could be performed at the time of account opening for accounts established following the effective date of the regulation if they had a mechanism to readily determine which Internet gambling activity was unlawful. They indicated it would be very difficult and burdensome, however, to ascertain which existing business customers conduct Internet gambling activity, because they have not maintained records on their accounts in a manner that would readily permit identification of such accounts. This requirement would be particularly challenging for the largest banks, which have millions of commercial account relationships.
Cross-border transactions. Most unlawful Internet gambling businesses are based outside the United States and therefore do not have account relationships with U.S. financial institutions. Instead, their accounts are held at foreign institutions, and restricted transactions enter the U.S. payment system through cross-border relationships between those foreign institutions and U.S. financial institutions or payment systems. The proposed rule, therefore, places responsibility on U.S. payment system participants that send transactions to, or receive transactions from, foreign institutions to establish policies and procedures reasonably designed to prevent these restricted transactions. For example, a U.S. correspondent bank could require in its account agreement that foreign institutions have policies and procedures in place to avoid sending restricted transactions to the U.S. participant.
Commenters stated that measures to prevent foreign institutions from sending restricted transactions to the United States would likely be unworkable. They believed that most foreign banks would not agree to modify their contracts with U.S. banks, particularly if Internet gambling is legal in a foreign institution’-s home country. Detecting and preventing cross-border Internet gambling transactions presents challenges that differ from other criminal financial transactions, such as money laundering or terrorist financing. Laws in many other jurisdictions impose compliance obligations upon financial institutions with respect to those types of financial crime- there are, however, few comparable compliance requirements with respect to Internet gambling.
Given that Internet gambling is lawful in many countries where U.S. banks have correspondent relationships, it may be particularly difficult to craft workable procedures to prevent individuals in the United States from making payments to a foreign Internet gambling company’-s account at a foreign bank. Moreover, commenters noted that, given the complexity of U.S. gambling law, it is unrealistic for foreign institutions to ascertain which forms of Internet gambling are unlawful and therefore should be prevented.
Many of these cross-border correspondent relationships support large volumes of daily payments that are wholly unrelated to gambling. It seems impractical to require U.S. banks to end these relationships because some small percentage of their overall payments may be directed toward unlawful Internet gambling. Therefore, there may be limited options for dealing with the international banking relationships through which most unlawful Internet gambling transactions are processed without causing significant disruption to international payment flows.
Overblocking. The proposed rule implements the Act’-s overblocking provision by stating that nothing in the regulation is intended to suggest that payment systems or their participants must or should block transactions explicitly excluded from the definition of unlawful Internet gambling. Banks and other payment system participants supported the proposed rule’-s implementation of the Act’-s overblocking provision, stating that the Act does not require that these gambling transactions, or any other transactions, be processed, but, instead, simply requires that the regulation itself not mandate that these gambling transactions be blocked. Some of these commenters indicated that, even before the Act’-s passage, they had decided to avoid processing any gambling transactions, even if lawful, because these transactions were not sufficiently profitable to warrant the higher risk they posed. In contrast, some organizations representing gaming interests commented that the rule should require payment system participants to process transactions excluded from the Act’-s definition of unlawful Internet gambling. Certain gaming interests recommended that the rule’-s policies and procedures for card systems at a minimum include the establishment of separate merchant category codes for the types of gambling that are not defined as unlawful under the Act. As noted in the proposal, the Agencies believe that the Act does not provide the Agencies with the authority to require designated payment systems or participants in these systems to process any gambling transactions, including those transactions excluded from the Act’-s definition of unlawful Internet gambling, if a system or participant decides for business reasons not to process such transactions. Nor do we possess any other authority that would allow us to do so.
In recent years, funding Internet gambling through the U.S. payment system has become more difficult, due in large part to steps card issuers and money transmitting businesses have already taken on their own initiative to prevent these transactions. Board and Treasury staffs are currently focused on developing a final rule that leverages existing practices to prevent unlawful Internet gambling transactions and provides additional and reasonably practical examples of actions that U.S. payment system participants can take to further impede the flow of restricted transactions through the U.S. payment system. As the comments to the proposed rule make clear, this is a challenging task, and the ability of the final rule to achieve a substantial further reduction in the use of the U.S. payment system for unlawful Internet gambling is uncertain. As part of this effort, we are carefully considering all comments received on the proposed rule and determining what modifications may be appropriate in light of the issues raised by those comments. Our objective is to craft a rule to implement the Act as effectively as possible in a manner that does not have a substantial adverse effect on the efficiency of the nation’-s payment system.
I would welcome any questions that the Committee members may have.
Will HedgeStreet USA, the hypothetical InTrade USA, and the hypothetical TradeFair USA, be regulated in the future by a merged SEC+CFTC regulatory structure?
That sounds like a good prediction market proposal.
As you all know:
- The SEC regulates the securities markets (which support capital formation).
- The CFTC regulates the futures markets (which exist to discover prices).
- The SEC is rules based, meaning it sets regulations that institutions must follow, while the CFTC is principles based, in that it sets broad parameters under which the regulated entities try to operate.
US Treasury’-s Blueprint for a Modernized Financial Regulatory Structure (PDF file).
The United States has the strongest and most liquid capital markets in the world. This strength is due in no small part to the U.S. financial services industry regulatory structure, which promotes consumer protection and market stability. However, recent market developments have pressured this regulatory structure, revealing regulatory gaps and redundancies. These regulatory inefficiencies may serve to detract from U.S. capital markets competitiveness.
In order to ensure the United States maintains its preeminence in the global capital markets, the Department of the Treasury (“Treasury”) sets forth the aforementioned recommendations to improve the regulatory structure governing financial institutions. Treasury has designed a path to move from the current functional regulatory approach to an objectives-based regulatory regime through a series of specific recommendations. The short-term recommendations focus on immediate reforms responding to the current events in the mortgage and credit markets. The intermediate recommendations focus on modernizing the current regulatory structure within the current functional system.
The short-term and intermediate recommendations will drive the evolution of the U.S. regulatory structure towards the optimal regulatory framework, an objectives-based regime directly linking the regulatory objectives of market stability regulation, prudential financial regulation, and business conduct regulation to the regulatory structure. Such a framework best promotes consumer protection and stable and innovative markets.
The CFTC is not that seduced by the idea (PDF file):
Statement of CFTC Acting Chairman Walt Lukken Regarding Department of Treasury’s Blueprint for Modernizing the Financial Regulatory Structure March 31, 2008 Washington, DC
Today, the U.S. Department of Treasury released a regulatory blueprint that includes recommendations to improve the U.S. financial regulatory structure with the goal of enhancing U.S. competitiveness in the global marketplace. Some of the proposals include recommendations related to combining the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC). CFTC Acting Chairman Walt Lukken made the following statement in response to the blueprint:
It is essential to examine ways to enhance the competitiveness of U.S. financial markets and seek improvements to the regulatory structure. Policymakers all strive for good government solutions that protect the public, reduce duplication and enhance competition and innovation. While I am still studying the Blueprint’s many recommendations, I applaud Secretary Paulson and the Treasury Department for their work on this critical undertaking and for recognizing the CFTC model of regulation as an advantageous one.
The CFTC utilizes a flexible and risk-tailored approach to regulation aimed at ensuring consumer protection and market stability while encouraging innovation and competition. [*] Congress gave the CFTC these powers with the passage of the Commodity Futures Modernization Act (CFMA) in 2000, which shifted the CFTC’s oversight from a rules-based approach to one founded on principles. This prudential style is complemented by strong enforcement against market abuse and manipulation as evidenced by the $1 billion worth of penalties assessed by the CFTC since the CFMA. [**] The regulatory balance fostered by the CFMA has enabled the futures industry to thrive and gain market share on its global competitors with volumes on the U.S. futures exchanges increasing over 500 percent since 2000. During recent economic stress, these risk-management markets have performed well in discovering prices and providing necessary liquidity.
Although the creation of a new unified regulator for securities and futures could bring efficiencies, the tradeoffs of such a significant undertaking should be weighed carefully given these turbulent economic times and the competitive global advantage currently enjoyed by the U.S. futures industry. The CFTC is a world-class regulator because of its focused mission, market expertise, manageable size, problem solving culture and global outlook—all of which may be jeopardized with the creation of a larger regulatory bureaucracy. Any regulatory reform effort must preserve the benefits of the CFTC’s principles-based model and recognize the distinct functions of the futures markets and mission of the CFTC.
Many of the benefits of a unified regulator can be immediately gained through enhanced coordination and information sharing between agencies. In fact, the CFTC and SEC recently signed a cooperation agreement aimed at addressing cross-agency issues, including the approval of hybrid products that may have otherwise fallen between our jurisdictional divide. These sorts of agreements should be given time to bear fruit. As Treasury recognizes in its Blueprint, the laws that govern the securities markets should be modernized similar to the futures laws before unification is contemplated to improve its chances of success. Unless the securities laws are first rationalized with those governing the futures markets, a merger may ironically make the U.S. futures industry less competitive globally and run counter to the explicit goal of this important endeavor. I look forward to working with policymakers to ensure that these issues are properly debated and addressed.
[*] Quite true.
[**] Which includes the fining of InTrade.
The Wall Street Journal
Via mister Jason Ruspini
Previous blog posts by Chris F. Masse:
- If I had to guess, I would say about 50 percent of the “name pros” you see on television on a regular basis have a negative net worth. Frightening, I know.
- You can’t measure the usefulness of a system by how many resources it consumes.
- STRAIGHT FROM THE DOUBLESPEAK DEPARTMENT: NewsFutures CEO Emile Servan-Schreiber, well known to chase tirelessly the Infidels who dare calling “prediction markets” their damn polling system, is eager to sell the confusion to his clients and whomever would listen.
- John Delaney is such a poor marketer that he is willing to outsource the making of InTrade’s next logo (a company’s most important visual message) to the first moron met over the Internet who is stupid enough to work for a bunch of figs.
- ProKons strongly believe that (play-money) prediction markets are bozo immune.
- REBUTTAL: SalesForce, StarBucks and Dell demonstrate that enterprise prediction markets as intra-corporation communication tools (as opposed to forecasting tools) are overhyped by the prediction market software vendors and a little clique of uncritical courtisans.
- Comments are often more interesting than the post that ignited them.
The information technology that caught Eliot Spitzer
Read the previous blog posts by Chris F. Masse:
- I get a kick each morning out of spying on the rich, famous, and powerful people updating their LinkedIn profile and connections. (Go to “InBox”, and click on “Network Updates”.)
- ??? BetFair bet-matching logic ???
- Eliot Spitzer has simply demonstrated once again that those who rise to the top of organizations are very often the most demented, conflicted individuals in any group.
- Business Risks & Prediction Markets
- Brand-new BetFair bet-matching logic proves to be very controversial with some event derivative traders.
- Jimmy Wales accused of editing Wikipedia for donations.
- What the prediction market experts said on Predictify
Reality check on TradeSports-InTrades recent statement
The spin doctoring goes like this:
TradeSports, the leading person to person retail trading exchange, continues to grow and innovate in the lead-up to this November’-s US elections.
Reality Check: The world’-s biggest retail, real-money prediction exchange is BetFair, actually.
TradeSports offers person to person trading services to thousands of registered members from all over the Globe who trade their opinions on hundreds of events such as the US November mid-term elections, the capture of Bin Laden, the Dow Jones at year end, and many sporting events.
Reality Check: TradeSports-InTrade is entirely dependend on its American clientele, which makes up for the bulk of its revenues.
We also provide prediction market data which is becoming the reporting standard on political and other future uncertainties to the world’s media, academia, investment businesses, state and political organizations.
Reality Check: Highly exaggerated, but true.
We will be launching a new “Express” trading interface in the coming weeks to further improve our service and to cement our position as the leading retail person to person trading exchange.
Reality Check: The world’-s biggest retail, real-money prediction exchange is BetFair, actually. As for improving the service, besides the “-Express”- interface, I suggest to seek regulation from the Irish government and membership from the Independent Betting Arbitration Service. In contrast, BetFair is regulated in the U.K. and is a member of IBAS.
Recent and historical legal directives in the US and other countries have been aimed at organizations in the business of bookmaking, an activity in which TradeSports is not involved.
Reality Check: The real-money prediction exchanges are not exempted from the Internet Gambling Prohibition and Enforcement Act of 2006. Also, there’-s no indication that the US Treasury and US DOJ will exclude the real-money prediction exchanges (a.k.a. betting exchanges) when they will enforce the law.
TradeSports is not a sportsbook or a bookmaker, and as an Irish Company, operating legally from Ireland, we will continue to provide our services to current and new registered members.
Reality Check: True. However, the problem will be how to make the money cross the Atlantic (from the U.S. clients to the Irish firm), now that Neteller is out of the US market.
Thanks to all our thousands of current and many new members, and those interested in our prediction market data for making TradeSports a phenomenon.
Reality Check: BetFair is a phenomenon, not TradeSports-InTrade, which a poorly managed company headed by some Irish people with
no questionable ethics, who behaved like thugs badly during the NKM episode. [See David Pennock’s comment.]