The changing impact of US financial regulations

US markets flourished in 2021, buoyed by a strong economy that kept corporate profit growth, a major driver of stock price activity, moving in an upward direction.

The barometer, the S&P 500, the measure of large US stock performance, gained an impressive 28.7%, with other parts of the market performing well too.

Roll in 2022, and it’s a different picture in Democratic President Joe Biden’s US. The Financial Times reported in February: “The US stock market has suffered its worst start to the year since the global financial crisis, as the threat of rising interest rates, slowing corporate earnings growth and geopolitical tensions sent stocks tumbling across the board.”

Rather than increasing, the S&P 500 index fell 5.3% in January, its biggest monthly decline since the pandemic start in March 2020 and the weakest January since the global financial crisis in 2009.

It’s a situation that is relevant across the investment industry, be it quantitative traders (across the $31 trillion of US stock market value, quant funds now own 35.1% of market capitalisation, compared to 24.3% of human-managed funds) or discretionary traditional traders.

So what US administration policy factors are impacting the financial markets?

A tighter monetary policy by the Fed (some forecasters predict that it will raise rates by 1.75% in 2022, more than in any year since 2005) and an unsettled legislative environment to the evolving COVID-19 pandemic all add up to the potential for greater volatility for the stock and bonds markets.

Then there is the regulatory outlook. President Biden has long promised to ‘crack down’ on Wall Street and big business, believing that for too long banking regulators have behaved like they work for the financial institutions they regulate – not the American people.

He has vowed a new era of tougher oversight and stricter rules.

In his sights are Chinese companies that list on US stock exchanges while bypassing American regulations because their lack of regulatory oversight is putting investors at risk.

He’s also concerned about the surge in trading seen by amateur investors during the pandemic and cryptocurrencies. He wants, too, to push big business to focus more on ESG factors such as workforce diversity and climate change.

Gary Gensler, Chair of the US Securities and Exchange Commission, has announced new rules for financial markets. The SEC proposals will require audits of private funds, bans on excess fees and prohibitions on preferential terms for certain investors in private markets.

In 2021, cryptocurrency soared in value and offered an opportunity for novice investors to get involved with few barriers to entry. Now that they’re mainstream, the public has been treating them as if they are typical stocks or bonds, but their regulatory status has not caught up. As a new and emerging technology, regulatory agencies are now attempting to regulate the crypto markets to offer protections for investors and prevent financial crimes.

The Federal Reserve has also announced that it will join the Network for Greening the Financial System, a network of 83 central banks and financial supervisors that aims to accelerate the scaling up of green finance and develop recommendations for central banks' role for climate change.

US regulations around anti-money laundering and countering the financing of terrorism are in the spotlight too and a lot of change is expected that financial institutions will need to adapt to.

America’s Financial Crime Enforcement Network (FinCEN) announced in 2021 that it is currently working on “streamlining, modernizing, and updating the anti-money laundering and countering the financing of terrorism (AML/CFT) regime of the United States.”

FinCEN Acting Director Himamauli Das has also stressed the importance of technology and innovation and highlighted that they are looking for ways to better promote a risk-based approach to AML/CFT compliance.

And while financial institutions are not required to incorporate the changes into their compliance programs until final regulations come into effect, FinCEN has suggested that institutions may well wish to begin getting prepared right now...