The US Financial Reforms Act 2010

The US Financial Reforms Act 2010

The Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010 aims to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end the ‘ ‘too big to fail’ ’ , to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

The Bill may remind the octogenarians of the Glass-Steagall Act of 1933, which placed a "wall of separation" between banks and brokerages and prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and an insurance company. Successive reforms sliced through the boundaries and the famous Gramm-Leach-Bliley Act (GLBA), allowed commercial banks, investment banks, securities firms, and insurance companies to consolidate as a millennium gift, in the name of the Financial Services Modernization. The present act re-instates the spirit of the Glass Steagall Act with a wider regulation on supervision of Big Banks, Non-Banking Financial Companies and OTC Derivative transactions by Swap dealers and Major Swap Participants, the latter being a term yet to be defined and impact of the act for such category to be articulated.

The Act makes sweeping reforms in the US Financial Services industry with path breaking mandates and stringent regulations on supervision, transparency and disclosures. The key provisions from the law being:

o Consolidation of regulatory agencies, elimination of the national thrift charter, and setting up a new oversight council to evaluate systemic risk.
o Comprehensive regulation of financial markets, including increased transparency of derivatives (bringing them onto exchanges)
o Significant Consumer protection reforms
o Tools for financial crises, including a "resolution regime" complementing the existing
o Federal Deposit Insurance Corporation (FDIC) authority to allow for orderly winding down of bankrupt firms.

In addition, there are various measures aimed at increasing international standards and cooperation, including proposals related to improved accounting and tightened regulation of credit rating agencies.

Regulators must now decide how to best implement the law, which will become effective in stages, with a substantial amount of the details having been left to the agencies to be decided through studies and rulemakings.

This paper closely examines the impact of the new law on Services, Application Portfolio and IT Inventory of both the market players and infrastructure firms.

Introduction

The wake of the recent recession left the capital markets landscape littered with the ghosts of failed institutions, products, platforms and most importantly regulations that could have either fore-warned or pre-empted the spate of events that followed in 2008-09.

Not surprising that the wait for the heavily debated, widely discussed and eagerly followed bill on the reforms for the US Financial Markets got over rather quickly on Wednesday, July 21, 2010, when the President of the USA signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act.

What to Look Forward?

The industry will need to adapt at an unprecedented pace to align with the new law that has set for itself quite an aggressive schedule for implementation and compliance. Some of the changes that will be observed fairly soon, include:

o Change in business models, demergers and priority shifts as the provisions relating to the Proprietary Trading, Swaps Execution, Capital Standards, Investor Protection and Emergency Financial Assistance, hit the ground.
o Loads of additional compliance and reporting to multiple agencies as new rules and reporting measures relating to Disclosures and Transparency come into being.
o Enhanced Prudential Standards for Systemically important firms, including inclusion of “Off Balance Sheet” items for computing Capital Requirements and concentration limits for mergers and acquisitions.
o Sweeping changes in trading, clearing and settlement of Derivative Contracts.

The impact to the Industry will be seen by way of leading Investment banks that converted into a Bank Holding Company, divesting themselves of their bank holding company charter to avoid stringent regulations around proprietary trading and ceiling on investments in private equity group and hedge funds. The OTC Derivative operators may alter their business models and activities, depending upon the legal interpretation and impact of the Swap Push-out Rule that denies Federal Assistance to major swap participants. This shall further change depending upon how the SEC and CFTC define who is a “major swap participant”

The Act and subsequent regulations may serve as a launching pad for future expansion of federal regulation into the financial services industry. For example, the creation of the Federal Insurance Office within the U. S. Department of the Treasury is just the first step towards the creation of an optional federal charter for insurance companies.

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