On the 21st July 2010, the US Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. It was the first of the G20 major economies’ responses to the commitments made at the G20 2009 Pittsburgh summit following the financial crisis of 2008. The Dodd Frank Act (DFA) (as it was later shortened to) was probably the largest legislative change to the regulation of the financial services industry since the Glass-Steagall Act of 1933. Due to its breadth and speed of enactment, it’s worth looking back on the Act’s 5th anniversary, initially at what was delivered but equally the legacy it has already created.
The DFA at a glance
- Over 22,000 pages of Dodd-Frank-related rule releases have been published in the Federal Register
- Over 800,000 Dodd-Frank related comment letters have been filed with the US regulators
- There are 848 pages of legislation in the Act
- There are 16 different Titles in the Act covering financial stability to orderly liquidation to investor protection, from Insurance to Mortgages to Derivatives
- 139 bills have been introduced into Congress to amend or repeal the Act, of which 5 were signed into law
- The Act was named after Senator Christopher J. Dodd (D-CT) and U.S. Representative Barney Frank (D-MA), who were the sponsors of the legislation.
The DFA legacy
The speed of enactment ahead of other regulatory regimes impacted the ability for discussion, coordination and consistency across the other G20 major economies. This is particularly relevant for Title VII of the Act, which covered derivatives. Derivatives trade globally, mitigating risks agnostic of national boundaries. Without close cooperation, harmonised rules and aligned implementation schedules, the desired transparency and reduction in risk, which were the key requirements coming out of the G20 2009 Pittsburgh summit, may not have materialised.
There are key differences in approaches to reporting derivative transactions between the DFA and the European Market Infrastructure Regulations (EMIR), for example single sided reporting versus dual sided reporting; Unique Counterparty Identifiers (UCI) versus Legal Entity Identifiers (LEI’s); Unique Swap Identifiers (USI’s) versus Unique Transaction Identifiers (UTI’s); and classification of impacted market participants, Swap Dealers (SD) and Major Swap Participants (MSP) versus Financial Counterparties (FC), Non Financial Counterparties (NFC + or -). These differences limit the ability for transparency when trades are aggregated globally.
Differences in timeframes for products eligible for electronic trading or central counterparty clearing between the DFA and MIFID II / MIFIR (which still have another 18 months before they come in force) have fragmented liquidity along national boundaries, and therefore the ability to mitigate risk globally.
Moreover, the speed of implementing the DFA impacted market participants’ ability to build and develop scalable, resilient, optimal infrastructure. Immediate compliance was the only option but it came at a cost: the immediate cost of infrastructure to get live; and the additional cost of re-building the infrastructure to support new regulatory regimes due to the lack of time to build extendible / dynamic infrastructure within the DFA timeframes.
So what about the next 5 years
The rules are written and legislation has been passed. Consequently there is limited scope to change the specific content of what has already been prescribed. However, harmonisation is required if global transparency and mitigation of risk is to be achieved.
Global organisations such as the Financial Stability Board or the International Organisation of Securities Commissions (IOSCO) need to prescribe global standards in consultation with regulators and national authorities. Standards around the process; the data (counterparty and trade identifiers); the actors (SD, MSP, FC, NFC), would be a good start. But a mechanism for equivalence, substituted compliance, and / or passporting is also necessary for information to be shared across borders.
Firms need to look back at what they delivered over the last 5 years to support DFA and the other regulatory regimes, and identify a strategy to normalise, consolidate and industrialise both the technology and the resourcing components of this investment. In parallel, firms should be working with other market participants, infrastructure providers and regulators to identify and set standards, and then implement and follow these standards.
The US DFA may have been the first legislation from the G20 major economies to set the new rules for the financial services industry but particularly for the derivatives markets, which have always been global markets serving global clients, a globally harmonised efficient and transparent operating environment is critical to mitigate the risks the G20 sought to address. There is still a long way to go to achieve this, but it is achievable through open and on-going collaboration between legislators, regulators, market participants and infrastructure providers globally.