An overview of the Dodd-Frank legislation, why it was enacted and what it may mean for your organisation.

1. INSIGHTS
Understanding 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 a
the 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
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2. 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 would
At BSG we are passionate be interested to know how this affects their relationship with the bank. This is something we
about 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 a
difference for our The breadth of monitoring requirements covers FX, legal, liquidity, credit, settlement and
customers and their operations. This could provide additional insight into the risk management services on offer to
customers. 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 info@bsguk.co.uk
Business Systems Group (UK), Registered in England No. 6150570, 230 City Road, London, EC1V2TT