INSIGHTSUnderstanding Dodd-Frank The Dodd-Frank Wall Street Reform and Consumer Protection Act is designed to prevent the need for any future taxpayer bailouts of financial institutions, ending the notion of “too big to fail”. Why was this legislation introduced? On 12 October 2012, Financial institutions are perceived to be too big to fail when their collapse would have such athe swaps transaction calamitous effect on retail banking depositors (i.e. the man on the street) that it is in the clock starts counting. national best interest to use taxpayer funds to shore up these institutions. Are you ready? In the late 2000’s global financial crisis, this was – for the most part – driven by financial institutions investing in complex derivative instruments (typically on their own behalf rather than on behalf of customers) which subsequently turned out to lose their value rather than appreciate. The scale of losses threatened these institutions’ ability to meet their obligations to retail depositors. Dodd-Frank legislation introduces steps to reinforce financial stability through improved accountability and transparency. This required the creation of new financial regulatory processes to protect consumers from abusive or speculative financial services practices. Additionally, some specific rules around types of trading that specific institutions can engage in have been introduced. How does Dodd-Frank work? Dodd-Frank aims to protect consumers and help prevent another financial crisis by monitoring systemic risk and increasing government oversight of trading in complex financial instruments (i.e. derivatives / swaps). It also widens the net in respect of which institutions will be subject to regulatory oversight. Although the focus is in many ways on regulating specific trading activities, Dodd-Frank also creates, consolidates and refines the mandates of a number of existing industry bodies which govern all aspects of the financial services industry. Specific aspects of the industry affected include insurance, equities trading, consumer protections and mortgages. In the UK market, the Of particular note, Dodd-Frank includes the Volcker Rule which restricts the types of Vickers proposal proprietary trading activities that financial institutions are allowed to practice in such as hedge funds, private equity funds etc. In other words, commercial banks cannot trade on their addresses “too big to own behalf for their own benefits in these types of instruments. This is specifically to avoid the fail” by creating a scenario where the banks’ own speculative investments which lose their value from ring-fencing threatening the safety of retail depositors’ funds. mechanism where corporate and retail Dodd-Frank legislation has necessitated significant changes across the body of regulatory banking will be split. authorities in the industry, including creation of a regulatory body with an industry wide mandate - the Financial Stability Oversight Council (FSOC) – which is to monitor risks that affect the entire financial industry. Business Systems Group (UK), Registered in England No. 6150570, 230 City Road, London, EC1V2TT www.bsgdelivers.com // @bsguk This document can only be reproduced in its entirety. This document does constitute any form of advice from BSG (UK).
INSIGHTS Understanding Dodd Frank What does it all mean? As can be expected with such a broad piece of legislation, it is not reasonable to refine the implications into a single set of compliance actions. We have identified some key areas which have been under review in recent projects. Personal accountability. Individuals with specific roles will take on personal accountability for regulatory oversight. These individuals will be nominated to the Securities and Exchange Commission (SEC) or Commodity Futures Trading Commission (CFTC) (as appropriate). Personal accountability introduces the potential for criminal liability in the event of gross negligence. Reporting on swaps data and position limits. Data capture, storage and reporting systems need to meet the new requirements for detailed and granular analysis of multiple portfolios and risk types. Management of counterparties. When recommending trading strategies to their counterparties, banks must ensure their counterparties completely understand the swaps, including all risks and rewards. Limit monitoring. Banks need to have early warning systems in place and make a record of all violations in limits and the actions taken to report to the regulator. Implementation of new policies and procedures. As is typical, the legislation creates some specific process obligations, supported by detailed procedures. Risk reporting and management. There is a need to review existing procedures for monitoring risks associated with swap activities including risk tolerance limits, risk exposure reporting and counterparty policies. Business Model. Depending on US presence and activity, substantial changes in business model could be required, e.g. changing the volumes and types of trades done in different jurisdictions to streamline the compliance process Does it even matter to UK banks? Yes. Any bank which does more than US$ 8bn worth of trades with US counterparts will need to register as a Swap Dealer and comply with all the requirements. This introduces significant reporting obligations, requirements to disclose certain information to the counterparts and need to adhere to certain margin / collateral requirements. Does it present any opportunities? Working to be Dodd-Frank compliant creates an opportunity for banks with global presence to use the Dodd-Frank approach as a blueprint for standardising compliance process and reporting structures globally. This will allow banks to benefit from process standardisation across their global presence introducing cost savings and the benefits of a common language across operating regions. With customers being more informed and increasingly aware of these regulations, they wouldAt BSG we are passionate be interested to know how this affects their relationship with the bank. This is something weabout design and delivery have observed within our own banking clients. It creates an opportunity for the bank to demonstrate how it is operating responsibly.of change which makes adifference for our The breadth of monitoring requirements covers FX, legal, liquidity, credit, settlement andcustomers and their operations. This could provide additional insight into the risk management services on offer tocustomers. clients. A collection of BSG (UK) BA practitioner www.bsgdelivers.com // @bsguk insight can be found at +44 20 7390 8674 http://bit.ly/bsgukinsight email@example.com Business Systems Group (UK), Registered in England No. 6150570, 230 City Road, London, EC1V2TT