The Financial Stability Oversight Council yesterday released its Final Rule on "Authority to Designate Financial Market Utilities as Systemically Important" and it released a report on "Secured Creditor Haircuts." While we're still reading (and mystified by) the former (and we see no mention of money market funds), the latter explains, "On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. Two of the goals of the Dodd-Frank Act are to promote market discipline and taxpayer protection. Section 215 of the Dodd-Frank Act calls on the Financial Stability Oversight Council to study whether allowing regulators in a resolution proceeding to treat a portion of fully secured creditors' claims as unsecured would promote these objectives. While section 215 contemplates evaluating secured creditor haircuts in the utilization of the orderly liquidation authority authorized by Title II of the Dodd-Frank Act, OLA provides no authority to impose secured creditor haircuts. Proponents of secured creditor haircuts believe secured creditor haircuts would be an effective means of promoting market discipline and taxpayer protection. They argue that secured creditor haircuts would: (a) cause secured creditors to engage in more extensive credit analysis and monitoring, thereby limiting the ability of the largest, most interconnected financial firms to pose a risk to U.S. financial stability; (b) promote taxpayer protection by giving the United States priority over a portion of the secured claims of other creditors; and (c) reduce collateral demands on distressed firms and discourage secured creditors from taking value-destroying actions that would force borrowers into failure. Others have questioned the efficacy of secured creditor haircuts in promoting market discipline and taxpayer protection, and have argued that secured creditor haircuts may have significant drawbacks."
