Emma Wittmer
At the core of the global economy is a public trust in central banks to execute monetary policy fairly and without bias. In turn, public trust allows central banks to execute effective monetary and fiscal policy. Today, as central banks raise interest rates to dampen rising inflation, central banks are drawing more attention to themselves from the public, and the fairness of their decisions are under heightened scrutiny.[1]
In December 2022, partially in response to such increased scrutiny, the European Central Bank (“ECB”) tightened its restrictions on trading and investments for its senior officials.[2] The changes were partially inspired by the U.S. Federal Reserve Bank’s trading and investment rules, which were announced in October 2021 as a response to multiple trading scandals involving top Fed officials.[3] The Fed trading rules are more restrictive than any others in the U.S. government and than any other central banks.[4] The ECB’s updated trading rules, though substantially stricter than before, are still not as restrictive as the Fed’s rules.[5] This raises the question of whether ECB restrictions are restrictive enough or Fed restrictions are too restrictive.
I. U.S. Federal Reserve Trading Rules
The Fed’s new set of trading rules garnered bipartisan praise for the lengths they took to prevent even the appearance of conflicted trades among Fed policymakers.[6] Prior to the new rules, there were three main trading restrictions on senior officials. The first was a blackout period around policy meetings so as to prevent trades based on Fed policy changes.[7] The second restriction was a ban on using nonpublic information for personal benefit.[8] Relatedly, senior officials could not invest in the financial institutions that they regulated.[9] Lastly, senior officials were required to make annual transactions disclosures.[10]
A string of dicey trades by top officials drew criticism from politicians and watchdog groups, and public trust in the Fed plummeted.[11] As a result, the Fed adopted new rules aimed at reducing both actual conflicted trades and the appearance of conflicted trades.[12] In sum, the new rules added to existing rules a ban on trading individual stocks outside of diversified funds,[13] a one-year minimum holding period for trades,[14] a requirement of 45 days’ nonretractable notice of a planned trade to ethics officers,[15] preclearance of trades by said ethics officers,[16] and a periodical disclosure reports within 30 days of a transaction to be published alongside annual disclosures to the relevant Fed or Reserve Bank’s website.[17]
II. Comparison of U.S. Fed and ECB Trading Rules
When the ECB started drawing attention for lowering interest rates, it became clear that improved ethics rules for its policymakers would be beneficial to the public’s perception of the ECB’s policy changes. The ECB generally adopted the same rules as the U.S. Fed; however there are a few differences.
First, the ECB only requires 30 days of non-retractable notice and only for allowed transactions above 50,000 EUR.[18] This is as opposed to the Fed’s notice requirement for all transactions.[19] Further, the notice requirement does not appear to be followed by a preclearance requirement.[20] Even if there was an implied preclearance requirement, transactions under 50,000 EUR would not require clearance. Though the most egregious conflicts of interest are likely to be over this threshold, multiple trades worth slightly less than 50,000 EUR is arguably still a significant amount to create or be the result of a conflict of interest.
Next, the ECB does not require periodic transaction reports.[21] This requirement acts as a transparency measure that allows for a quick identification of a potential conflict of interest.[22] In addition to catching actual conflicts, this transparency prevents even the appearance of preventing actual trades, as the public has the nearly immediate opportunity to judge for themselves whether there was a conflict.[23] Even as a retroactive check on potential conflicted trades, this requirement has proactive effects. Senior officials making trades with the knowledge that information about their transaction is publicly accessible may be extra cautious to prevent fallout of an apparently conflicted trade.[24]
Though most of the ECB’s differences are less restrictive, the ECB also includes an explicit emphasis that members should be limited to engaging in medium to long-term investments.[25] Though the spirit of the Fed rules indicate that senior officials should focus is on longer term investments, the rules are not explicit about this requirement.[26] In sum, while the Fed and the ECB rules differ slightly, they are both in furtherance of less conflicted and ultimately more effective policymaking.
[1] The Federal Reserve has a Credibility Problem, Wash. Post (Dec. 14, 2022), https://www.washingtonpost.com/opinions/2022/12/14/federal-reserve-credibility-inflation-trading-speeches/.
[2] Press Release, European Central Bank, ECB Publishes Enhanced Rules for Private Financial Transactions of High-Level Officials (Dec. 16, 2022), https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.pr221216~93f4c11548.en.html [hereinafter “ECB Press Release”].
[3] Alexander Weber, ECB Tightens Trading Rules for Officials in Wake of Fed Scandal, Bloomberg (Dec. 16, 2022), https://www.bloomberg.com/news/articles/2022-12-16/ecb-tightens-trading-rules-for-officials-in-wake-of-fed-scandal.
[4] Michael S. Derby, A year after trading scandal, Fed is again under ethics spotlight, Reuters (Nov. 1, 2022), https://www.reuters.com/markets/us/year-after-trading-scandal-fed-is-again-under-ethics-spotlight-2022-11-01/.
[5] Weber, supra note 3.
[6] Derby, supra note 4.
[7] Federal Open Market Committee Rules and Authorizations, Fed. Open Mkt. Comm. at 26 (2017), https://www.federalreserve.gov/monetarypolicy/files/FOMC_RulesAuthPamphlet_201701.pdf.
[8] Id.
[9] Id.
[10] Id.
[11] Claire Williams, Amid Trading Controversies, Public Trust in Federal Reserve Hits New Tracking Low, Morning Consult (Sept. 29, 2021), https://morningconsult.com/2021/09/29/public-trust-in-federal-reserve-data/.
[12] Ethics and Values, Fed. Rsrv. (last updated Oct. 28, 2022), https://www.federalreserve.gov/aboutthefed/ethics-values.htm#:~:text=Financial%20Disclosures%20Board%20members%2C%20Reserve%20Bank%20presidents%2C%20and,no%20later%20than%2045%20days%20after%20the%20transaction.
[13] Fed. Open Mkt. Comm., Investment and Trading Policy for Senior Officials, at sec. 3 (Feb. 17, 2022) [hereinafter “FOMC Trading Policy”].
[14] Id.
[15] Id.
[16] Id.
[17] Id. at 5.
[18] Code of Conduct for High-Level ECB Officials, art. 16.6, 2022 O.J. (C 478) 3 (EU) [hereinafter “ECB Code of Conduct”].
[19] FOMC Trading Policy, supra note 13.
[20] See generally, ECB Code of Conduct, supra note 18.
[21] See generally, ECB Code of Conduct, supra note 18 at art. 10.
[22] ECB Press Release, supra note 2.
[23] See generally Michael S. Derby, A Year After Trading Scandal, Fed is Again Under Ethics Spotlight, Reuters (Nov. 1, 2022), https://www.reuters.com/markets/us/year-after-trading-scandal-fed-is-again-under-ethics-spotlight-2022-11-01/.
[24] See generally id.
[25] ECB Code of Conduct, supra note 18 at 4.
[26] See FOMC Trading Policy, supra note 13 at 3–4 for Fed requirements that inconvenience short term trading for its senior officials.