Dodd-Frank and the Global Culture Change
Author’s Note: Happy Veterans Day!
“The impact of Dodd-Frank for foreign banks is going to be widespread and long-lasting,” according to a recent report by Boston-based research and consulting firm Celent. “The new rules would alter the trading strategies and operations of most of the large swap trading firms globally.”
U.S. firms would see less international business if those foreign banks dodge new compliance costs by curtailing their American trading activities. Celent released its report last week, as foreign regulators warned the U.S. Commodity Futures Trading Commission (CFTC) that its proposed new derivatives rules could brutalize global markets.
The Dodd-Frank Wall Street Reform and Consumer Protection Act is a complex beast, and its potential impact on international transactions made it the hottest topic at last week’s Sibos Osaka 2012, according to Ruth Wandhöfer of Citi’s Global Transaction Services. Yet much of Dodd-Frank is behind schedule, with the bulk of it still unwritten.
The ever-nebulous implications of such a far-reaching regulatory scheme is a source of concern for many financial institutions in the U.S. and abroad.
Beyond the Sea
Regulation in Europe is running late too, as many of the 28 too-big-to-fail Global Systemically Important Financial Institutions (GSIFIs) will not finish their living wills — instructions for avoiding systemic calamity if the bank fails — by the year’s end, according to The Financial Times. Meanwhile, only about one-third of Basel Committee on Banking Supervision member nations are likely to enact Basel III reforms by the intended deadline in January.
“There is more to be done,” said Wayne Byres, general secretary of the Basel committee. “We have not yet completed the full set of policy reforms.”
Reforms include more than tripling capital surcharges — cash that banks keep on hand to help weather another financial crisis. Chinese banks may go even farther than Basel III rule changes, though the China Banking Regulatory Commission offers a longer transition period — up to 10 years.
But Dodd-Frank’s Volcker rule will likely have the greatest impact on trading systems, reining in banks’ risky behavior via special rules for large traders and market access.
“These rules require that trade transactions be monitored, certain calculations be moved closer into the trade order generation process, and more transaction level details be retained for audit reasons,” SAP’s Sinan Baskan told Markets Media. “New applications that consume detailed data will be developed and executed at trading time, and the data retention needs will add to the data warehousing capacity requirements.”
Complying with those requirements will be expensive for many firms, making the Volcker rule a thorn in the industry’s side. But Dodd-Frank is even more popular in the U.S. than President Barack Obama’s healthcare overhaul, according to a Gallup poll, diminishing the likelihood that lobbyists can seriously limit — let alone scuttle — financial reform.
“With the advancing regulatory legislation, financial institutions are beginning to recognize the weight near-real time and accurate risk infrastructure holds within the front office,” SAP’s Stuart Grant told Markets Media. “Allowing the trading desk to employ risk controls that are industry and regulatory compliant will require investments in technology, risk strategy, innovation and culture change.”
Indeed, there should be a culture change that embraces simpler financial instruments and tighter compliance. Responsible regulation would make the industry safer for everyone in the 21st Century.
“Dodd-Frank extraterritorial concerns remain” by Bruce Love
“Biggest banks given extra time on reform” by Brooke Masters