The winner of the U.S. Presidential race today will oversee either the next chapter for Dodd-Frank or its demise, and this will help firms decide how to move forward.
The winner of the U.S. Presidential race between incumbent Democrat Barack Obama and Republican challenger Mitt Romney will oversee either the next chapter for Dodd-Frank or its demise. For financial services firm, the choice voters make today will help them move out of an IT project limbo and toward more regulatory compliance or initiatives for competitive advantage.
Firms find themselves in limbo because while they plan for the next round of regulations from the Obama administration and Dodd-Frank, officially known as the “Wall Street Reform and Consumer Protection Act,’’ they are hesitating because of a distinct possibility that a Romney administration might put a stop to regulatory reform.
The sweeping, controversial Dodd-Frank legislation encompasses much of the securities trading process, including supervision of payment, clearing and settlement operations. It attempts to provide transparency and greater protections for investors hurt by the financial misconduct at the core of the Great Recession via the Financial Stability Oversight Council and the Office of Financial Research. There are provisions for the FDIC, the insurance and reinsurance industries, the creation of the Consumer Financial Protection Bureau, and reforms for mortgage and lending practices.
Some of the more far-reaching changes of Dodd-Frank have been an overhaul of the over-the-counter (OTC) swaps market, SEC registration for hedge funds and private equity firms, which is leading to more regulatory oversight, and the Volcker Rule, which prohibits proprietary trading.
Yet much of Dodd-Frank is itself in limbo.
A recent report from the state of New York’s Office of the Comptroller (OSC), headed by Thomas P. DiNapoli, estimates that as of Oct. 1, 2012, “only one-third (127) of the rules [of Dodd-Frank] had been completed. Another 135 rules have been proposed but not finalized and 136 rules have yet to be proposed.”
Thus, two-thirds of the Dodd-Frank Act is still being processed and could possibly never come to fruition.
In such a situation, the one thing that the victor of the Presidential contest cannot do is to keep the situation on hold and allow the industry “to be in limbo even longer,” says Lyn Marcrum, a senior analyst with market research firm Aite Group. “It’s a prolonged limbo because there are so many decisions that financial services firms have to make.”
An OTC Consensus?
One area approaching consensus is the transparency, execution and clearing reforms slated for OTC swaps, and many industry observers say these reforms are far too advanced for a new President and Congress to suddenly and radically repeal.
Recently, CFTC commissioner Bart Chilton told FTF News that the new OTC regulations “would not lose a whole lot of steam no matter who the president is.” In large part, few politicians want to return to the unregulated days that led to the Great Recession that began in late 2008 and “that we’re still reeling from,” he says.
The momentum for OTC reform—the creation of swap execution facilities (SEFs), swap data repositories (SDRs), new collateral management requirements and so on—has taken on a life of its own that the government may not able to halt.
“I think by the time [Romney] would be able to do something about it, it would be pretty close to being too far along to stop,” Marcrum says about a potential Romney administration’s attempts to repeal OTC reform.
The alternative is a radical, meat ax approach that would likely upset the economic allies of the U.S.
“It would be seen as a major flip-flop outside the US, in general,” Marcrum says. “I think that would put us out of synch with the rest of the world in addressing everything.”
The Romney Approach
Yet Romney has vowed to repeal Dodd-Frank and is likely to tackle Dodd-Frank in a piecemeal approach that is “may be more palatable” for everyone, Marcrum says.
In addition, by sidestepping the wholesale repeal, the Romney administration could keep what it likes from Dodd-Frank. In speeches and during the first presidential debate, Romney has said that there are parts of Dodd-Frank that he likes although he has rarely been specific.
Whether or not Romney wins, one area of Dodd-Frank likely to be revisited are the burdensome requirements and expenses governing such matters as wire transfer services and the offering of stable mortgages, which are hampering community banks. In fact, the Dodd-Frank compliance demands are causing some community banks to exit the business as much larger institutions often have the additional resources to handle the added burdens and costs.
“We are now suffering more collapsed banks [in Georgia] than in any other state, including California,” says U.S. Senator Saxby Chambliss (R-Ga.), who spoke at a panel discussion on bipartisanship during SIFMA’s annual meeting on Oct 23; Senator Mark Warner (D-Va.) also took part in the event.
Another key area of attention is the Volcker Rule, which Marcrum says is government overreaching its bounds.
“When you get in and start telling the banks this can be your business and that cannot be your business—regardless of whether you can do it well and make money for your shareholders—I have a problem with that,” she says.
“To me, that’s going beyond regulation,” adds Marcrum. “If you’re a bank, it would seem to me that there’s a way to structure your organization so that you can still be a bank and have enough walls around these risky units so that they don’t have to take down the whole bank.”
The jury is still out on the Volcker Rule as the SEC and banking regulators are locked in a dispute over the regulation that may prevent its debut this year, according to the Wall Street Journal.
Despite the internecine struggles, the death by a million cuts approach will likely have to wait as Romney has said that he will make job creation his top issue.
Fighting Black Magic
The top issue for Dodd-Frank supporters is to prevent a return to “a level of black magic that was virtually unprecedented” during the dark days of the Great Recession, says Senator Warner via the recent SIFMA panel. Warner, who says he worked behind the scenes on Title I and II of Dodd-Frank, is urging that the industry let the regulators hammer out the details.
In fact, Warner says that when he and others in Congress were working Dodd-Frank, they were strongly urged to steer clear of too much specification and “to punt this to the regulators” because they would be better able to work out the details.
But punting to the regulators guaranteed that implementing Dodd-Frank would not be complete in a year after it was signed into law as was promised by proponents.
“I’m really not surprised that we’re only a third of the way there,” Marcrum says. “If we continue at this pace, it will take another term or so to get it done. I don’t think Obama being there will make it happen any faster.”
Obama’s presence is also not required for firms that have to implement IT strategies to comply with the new regulations. That will take IT staff familiar with data management platforms.
“In order to report the information, you have to have it,” Marcrum says. “You have to know where to get it. Then you have to normalize it, aggregate it and make it into something a regulator can cope with.”
Firms are “all over the board” when it comes to data gathering, Marcrum says. “Some have already made great strides in how their data comes, how they handle it in a standardized way and route it to where it needs to be.
“So many other firms are still getting emails, they’re still getting feeds, Excel spreadsheets, or they’re taking stuff from an automated feed and putting it into a spreadsheet,” Marcrum adds. “I had hoped and still hope that the threat of the rest of Dodd-Frank would force people to make those underlying, internal infrastructure changes because that would only be for the better.”
The threat of new regulations is still an effective strategy in getting firms to fund much-needed projects. “It’s still going to be a tough sell but if you have the threat of regulation you can get it done,” says Marcrum.
To underscore her point, Marcrum recalls an official at a custodian bank at SWIFT’s Sibos two years ago who said that 55% of the firm’s budget is for regulatory implementation leaving less than half of the budget for those things that have to be done. “I can only imagine how much of firms’ budgets now are devoted to things that they have to do.”
Yet if the government pulls the plug on Dodd-Frank, then these required systems could become suddenly obsolete.
“Firms would have these half-built, Frankenstein systems that are almost good but not quite,” Marcrum says.
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