SIFMA held its Dodd-Frank Impact Analysis Summit in New York City on July 13, bringing together almost 500 industry participants for a day-long discussion just prior to the first anniversary of the Act’s passage. In addition to Tim Ryan (SIFMA CEO), the summit included guest speakers Larry Kudlow, Evan Thomas and Mary Miller (Treasury Assistant Secretary) along with several panel discussions. SIFMA has been actively working with many of the 22 federal agencies that are implementing the Act through discussions and filing more than 100 comment letters.
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It is clear to all that the almost 250 rules that will come out of Dodd-Frank will drive new operating models for capital markets firms. What is very unclear, according to Tim Ryan, is the overall impact to the economy and the industry from the rulemaking process. A member of the systemic risk panel questioned “the trade-off between increased safety and impediments to growth – at what point does it become too high?” Another panelist, discussing the cumulative effect of the Act, stated that “large firms that can raise money in public offerings are doing well, [but] small firms that rely on banks [for financing] are still mired in the recession”.
Who’s on first, what’s on second?
The individual investor panel discussed Section 913 of the Act, which directs the SEC to study a uniform fiduciary standard for brokers and investment advisors. One panelist termed this as “poor regulation leading to litigation” when discussing the confusion about how to implement regulations that may come from the SEC and the Department of Labor, which is getting involved due to its oversight of ERISA. Another panelist highlighted issues with 913 rulemaking that could affect proprietary trading, principal trading and IPOs, stating that “rules must be written to tell firms how to cover broker-dealer activities, which are many and varied.” A final panelist concluded with a suggestion that “the safe harbor for firms [is to] migrate everything to the 40 Act and fee-based accounts,” which the panel concluded will hurt small investor IRAs, with costs going up 50-100 percent.
The OTC oncoming train
Dodd-Frank will mandate significant change through Title VII in the way that capital markets firms and their clients will use and clear derivatives. Both the CFTC and SEC are involved in rule-making, with differing time lines on hearings and margin requirements leading to uncertainty and confusion. One member of the OTC derivatives panel told the audience “if you like ambiguity and transition this is the place to be.” Panel members highlighted the technology changes that will be needed to support the new regulations, which will be “complex, [with] significant resources required” that will result in “the greatest traffic jam ever seen.” Attendees were advised to focus on “risk reduction over changes in trading practices” and “prioritize data reporting.”
The winds of change; blowing at gale force
How will new regulations like Dodd-Frank and Basel III affect financial services firms? A participant from McKinsey on the business model panel predicted a 5-6 percent hit to ROE from the two regulatory initiatives, telling the audience to expect massive restructuring. A panelist, commenting on the capital surcharges from G-SIFIs and G-SIBs, stated that there is “no incentive to grow due to the capital bands,” “mid-tier banks will have trouble growing given the capital charges,” and the cost of credit will rise due to the increase in capital. The Volker Rule limitation on proprietary trading was singled out for its unintended consequences and high cost of compliance, which could impact the structure of markets. The overall impact, according to a panel member, will be that “trading volumes will flow to outside of the US.”
The financial sector outlook panel described a “major impact on the financials of capital markets banks” from the revenues impact and uncertainty. My view is that the regulatory avalanche of Dodd-Frank will drive capital markets firms to implement GRC solutions to achieve and monitor compliance. Firms will also need to improve data management so that they can report the additional data that regulators will require.