Our Take: financial services regulatory update – January 31, 2025

• What happened? On January 28^th, the U.S. Office of Personnel Management (OPM) sent an email to federal employees with an offer to receive full pay and benefits until September 30^th if they opt-in to resign by February 6^th.
• Separately, it has been reported that the FDIC has rescinded outstanding examiner job offers in response to the hiring freeze executive order.
• What are the terms of the offer? The Administration followed the email with a series of FAQs clarifying that federal employees do not need to work and can get a second job during the deferred resignation period. However, the sample resignation email states that the employee will complete “reasonable and customary tasks and processes to facilitate” their departure. The FAQs also said that while employees can rescind their resignation at any time, their employing agency has to review and approve the rescission request.
• The original email said that employees should consider forthcoming changes to federal workforce policies including the termination of remote work, updated performance standards, downsizing, and “enhanced standards of suitability and conduct” prioritizing reliability, loyalty and trustworthiness.
• How have employees reacted? It is not yet clear how many of the more than two million federal employees will take the offer, but unions did not react positively. The National Treasury Employees Union strongly urged its members to reject the deferred resignation offer. The American Federation of Government Employees noted that the terms of the offer do not preclude terminated or otherwise adversely affected during the deferred resignation period. Some Democratic Senators, like Mark Warner (D-VA), Tim Kaine (D-VA) and Chris Van Hollen (D-MD) encouraged federal employees to consider the possibility that the Trump Administration would not fulfill the terms of the offer.
• What’s next? Federal employees must decide whether to take the deferred resignation offer by February 6^th.

Our Take

Can they do that? Much of the response to the OPM email has concerned the legal authority behind the offer. The ultimate answer may be determined by the courts, but there are reasons to question the Trump Administration’s ability to follow through with the terms of the offer. During the Clinton Administration, the Federal Workforce Restructuring Act authorized voluntary separation incentive payments (VSIPs) but it set a maximum amount of $25,000 and required OPM to submit a plan for how agencies will operate without a specific list of positions to be eliminated. OPM has not submitted any such plans and eight months of pay and benefits for most federal positions exceeds the VSIP maximum. A different law, the 2016 Administrative Leave Act, caps the length of administrative leaves to 10 work days per calendar year. Federal employees are undoubtedly assessing statements from their unions and other advisors along with the possibility that they may be terminated before September 30^th.

Voluntary or involuntary, cuts are coming. The email sends a clear warning that the Trump Administration wants to dramatically reduce the federal workforce and that the offer is just a precursor to involuntary cuts. Regardless of outstanding questions on whether the OPM offer is legal, some federal employees will take the risk and submit their resignations, particularly if they expect to be terminated or face more difficult work conditions in the coming years. Financial services agencies are among the departments likely to lose staff during this time, creating vacancies that may not be filled if new appointees comply with the hiring freeze. There is reason to believe that the financial services agencies will face challenges fulfilling their statutory responsibilities with further reductions to their staff. The FDIC’s April 2023 report analyzing its supervision of Signature Bank noted that “persistent staffing shortages” affected the timeliness and quality of examinations. The report also stated that a number of large bank dedicated teams still had “significant vacancies.” If the FDIC experiences resignations on top of the rescinded job offers, the Signature Bank report suggests that slimmed down examination teams could result in lengthier and lower quality exams that could fail to prompt remediation of significant risks.

• What happened? On January 24^th, the Securities Industry and Financial Markets Association (SIFMA) and other industry groups sent a letter to Acting SEC Chairman Mark Uyeda to request at least a one year extension of the compliance dates for expanded central clearing for transactions involving U.S. Treasuries, which the SEC adopted in December 2023.
• Why does the industry want a delay? The letter includes several reasons that the industry groups feel that the current compliance timeline is too short:
  • Unresolved issues: The industry needs clarification on questions around mixed CUSIP tri-party transactions, inter-affiliate exemptions, double margining, and the extraterritorial scope of the rule.
  • Market readiness concerns: Firms need more time to develop legal, operational, and business infrastructure to comply with the rule and adapt their onboarding processes for clearing agreements.
  • Comparison to past industry reforms: The letter notes that other major market changes, such as the LIBOR transition and uncleared margin rules, had significantly longer implementation timelines.
• What’s next? The sole covered clearing agency (CCAs), the Fixed Income Clearing Corporation (FICC), is currently supposed to implement new risk management practices, customer asset protection polices, and access to clearing and settlement services by March 31^st, 2025. Direct Participants of FICC are expected to comply with central clearing of Treasury cash transactions by December 31^st, 2025.

Our Take

This request is likely to be granted. With a change in leadership since the central Treasury clearing rule was finalized, it is likely that the SEC will be amenable to a delay of compliance dates while Chair nominee Paul Atkins gets confirmed and takes time to review the current slate of rulemaking. Atkins will likely want to thoroughly consider the unresolved issues cited by the industry groups, the access models and capital implications introduced by central clearing, and applications by additional CCAs. In his past stint at the SEC, Atkins supported regulatory reform to reduce compliance burdens, so he may even want to assess ways to modify the framework surrounding central Treasury clearing to make it easier for firms to adapt their operations. At a minimum, he will likely agree with the major industry groups signing the letter that the SEC should allow more time for careful implementation to avoid adding risk to the world's most liquid and important market.

For more on expanded central Treasury clearing see:

• U.S. Treasury clearing: The countdown continues
• FICC proposes access rule amendments
• FICC proposes margin amendments
• Expanded central Treasury clearing: The countdown begins

These notable developments hit our radar recently:

Senate hearing on de-banking. On February 5^th, the Senate Banking Committee will hold a hearing on “de-banking”. The hearing comes after comments by Trump and Chairman Tim Scott (R-SC) on financial institutions allegedly cutting off law-abiding customers, including those in the energy, firearm and digital asset spaces, from accounts and other financial services.

Bowman speaks on monetary policy and the regulation of mutual and community banks. On January 31^st, Fed Governor Michelle Bowman delivered remarks in which she explained the Federal Open Markets Committee’s (FOMC’s) decision to hold the federal funds rate target range steady at 4.25-4.5% and outlined her prediction for inflation to slow over the course of the year. On bank regulation, she emphasized the need for tailoring regulations based on bank size, risk profile, and complexity to prevent excessive burdens on smaller institutions. Bowman also critiqued regulatory inaction on fraud, particularly the rise in check fraud and expressed skepticism about climate-related financial risk regulations.

Banking agencies announce public outreach meeting. On January 31^st, the Fed, FDIC and OCC jointly announced March 6^th as the date of the second public outreach meeting as part of their mandatory 10 year review of regulations. The Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) requires the agencies, with input from the public, to review their regulations at least once every 10 years to identify any outdated or otherwise unnecessary regulatory requirements applicable to their supervised institutions. Interested stakeholders are to use this meeting as an opportunity to present views on the six categories of regulations listed in the first two Federal Register notices.

Agencies extend reporting compliance date. On January 29^th, the SEC and CFTC jointly announced an extension of the compliance date for expanded reporting on Form PF from March 12^th to June 12^th, 2025. Form PF is the confidential reporting form for certain SEC-registered investment advisers to private funds, including those that also are registered with the CFTC as a commodity pool operator or commodity trading adviser.

Cruz seeks to defund CFPB. Senator Ted Cruz (D-TX) introduced the Defund the CFPB Act which would set the amount of Fed funding to the CFPB at $0. The CFPB’s funding through the Fed and outside the Congressional appropriations process has long been criticized by Republicans, but it was ruled constitutional by the Supreme Court in May 2024. Passage of this bill would require either Democratic votes or removal of the legislative filibuster.

The following chart is an approximate projection of financial services agency appointments and term lengths. Cabinet secretaries and Chairmen of the SEC and CFTC are typically replaced by a President of a new party. Supreme Court rulings allow the President to remove the Comptroller of the Currency and CFPB Director and President Trump is expected to do so.

^{1 Michael Barr will step down as VCS on February 28th, 2025 but will remain on the Fed Board as a Governor. President Trump will need to choose another existing Governor as the new VCS or move them to a position at another agency to create a vacancy at the Fed.}

^{2 The Comptroller of the Currency and CFPB Director are members of the FDIC Board. Because FDIC bylaws prohibit more than three members of one party on the Board, the Vice Chair and Internal Director cannot be Republicans if Trump’s nominees to lead the OCC and CFPB are Republicans. Jonathan McKernan’s term technically expired in May 2024.}

^{3 Johnson’s and Goldsmith Romero’s terms have expired but they may remain on the Commission until their replacements are confirmed.}