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Ian Hook

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Ian Hook - Cognia

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Dodd-Frank - Is it worth it?

27 July 2013  |  4793 views  |  0

President Obama signed the Dodd-Frank Act into federal law in July 2010. The Act’s primary goal is to increase transparency in the financial markets and prevent another financial collapse. However, since Dodd-Frank’s (DF) passing into law almost three years ago, only 38% of the 398 rules needing to be written and implemented have been. Questions have now arisen as to what is holding up the implementation, and whether such a large and cumbersome piece of reform should even be implemented at all.

Who is responsible for implementing the Dodd-Frank Act?

The implementation of DF is down to several bodies including the Commodity Futures Trading Commission (CFTC), Federal Communications Commission (FCC) and the Securities and Exchange Commission (SEC). The SEC in particular is responsible for making public companies disclose meaningful financial information to provide a common pool of knowledge for investors. More importantly, they are an enforcement authority i.e. they bring civil enforcement actions against individuals and companies for violations of securities legislation. The SEC works in conjunction with the CFTC to provide the rulemaking and implementation for Commission proposals.

Who or what is to blame for the slow implementation?

Industry lobbyists are renowned for trying to slow down unfavourable regulation, especially in the international derivatives market. Recent research suggests that some industry groups employ more than 80 lobbyists, whilst there are approximately only 18 lobbyists working for the top five consumer groups. Their message to regulators was clear: restrictions were not needed and the market should be left to regulate itself. Banks in particular may worry about the implications of DF, as they fear a loss of competitiveness and an increase in compliance costs.

The primary way in which lobbyists may attempt to brake DF’s implementation is by returning to Congress to challenge sections of DF, leaving it smaller and therefore less disruptive to current ways of working. Further to this, a lack of funding to regulatory bodies has hampered full implementation. As recently as February 2013, the SEC complained of underfunding.

Regulators have a huge job on their hands largely due to DF’s vast complexity. With pressure from several bodies at once for lesser or greater regulation, its large bureaucratic wheels can never seem get things done fast enough.

Perhaps where DF has failed is in its leaving the tough work of defining the rules and implementation up to existing federal agencies, who already failed prior to 2008 at getting a handle on the clouded business that is the swaps market.

Is the SEC wasting their time trying to implement such a large regulatory document?

In short, no. It cannot be denied that in order to prevent a repeat of the late recession more stringent measures were needed. As CFTC Chairman Gary Gensler explained on 12 May, DF is necessary to “bring public market transparency and the benefits of competition to the swaps marketplace.”

Attempts to stall the DF Act by restricting funding to regulatory bodies will only hamper growth and have a corrosive effect on the stability of the financial system.

One example of an area where regulation has already proved its worth is voice recording – a requirement that will greatly improve the transparency of the financial markets and has already begun to do so. Had it been introduced earlier, rogue traders such as Jérome Kerviel and Kweku Adoboli may have been caught earlier before they lost billions.

The real challenge

Implementing and enforcing this particular regulation will not be a waste of time for the SEC and CFTC, or for the banks. The biggest mountain the regulatory bodies must climb is not temporal, but that of regulating an industry with unlimited funds. The need is not for more regulation, but smarter regulation. Banks may find it daunting, but can profit in the long run from more stable markets and increased transparency.

The tendency to consider Dodd-Frank another pointless piece of bureaucracy is out-dated. Regulations such as voice recording can provide benefits to a business such as monitoring staff and the ability to analyse incoming and outbound calls.

TagsTrade executionRisk & regulation

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Dodd-Frank - Is it worth it?

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