Dodd Frank Act
The Dodd-Frank Act requires an unprecedented two- to five-year rulemaking process where roughly 250 new regulations need to be researched and written by at least a dozen regulatory agencies.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama on July 21, 2010. Now, we are in the midst of a rulemaking process that is designed to ensure a broad range of issues and detailed expertise – industry, economic, scientific and consumer – are incorporated at various stages. The end goal of this process is to ensure final regulations are balanced, consistent with the intent of the initial legislation, and avoid any potential unintended consequences.
The Dodd-Frank mandate is the largest in generations: 235 rulemakings, already generating 41 reports, 71 studies authored by 11 different federal agencies and bureaus. Much work has been already done, 100 new rules have been finalized. But, we still have a long road ahead of us. 155 deadlines have been missed. 117 rules have yet to be proposed.
Regulators are faced with a daunting task of implementing Dodd-Frank. To complicate matters, multiple regulators have joint jurisdiction over the same markets and products.
Four priority areas related to the Dodd-Frank Act that have identified as critical issues:
- Systemic Risk Regulation
- Resolution Authority
- Volcker Rule
- OTC Derivatives
- Recovery and Resolution Planning
- Resolvability Assessments
Legislation representatives from business policy, legal and government affairs have been assigned to manage day to day efforts on both priority issues and all other relevant rulemakings.
- 12 CFR Part 327 Assessments Large Bank Pricing
- 12 CFR Part 360 Resolutions Plans
- 12 CFR Part 380 OLA Title II
- 12 CFR Part 381 Resolution Plan Required
The Regulatory Agencies
- Bureau of Consumer Financial Protection (CFPB)
- Commodity Futures Trading Commission (CFTC)
- Department of Education
- Federal Deposit Insurance Corporation (FDIC)
- Federal Energy Resources Commission (FERC)
- Federal Housing Finance Agency (FHFA)
- Federal Reserve Board (FRB)
- Financial Stability Oversight Council (FSOC)
- Government Accountability Office (GAO)
- Municipal Securities Rulemaking Board (MSRB)
- National Credit Union Administration Board (NCUAB)
- Office of the Comptroller of the Currency (OCC)
- Office of Financial Research (OFR, part of FSOC)
- State Governments
- U.S. Securities and Exchange Commission (SEC)
- U.S. Department of the Treasury
Systemic risk generally describes the interdependency of institutions in global financial markets and the domino effect that can arise from correlated risks and the failure of a single or handful of financial institutions.
Financial experts generally agree that risks associated with liquidity, credit and monetary policies can all create systemic vulnerabilities. Without a central federal regulator to look across financial institutions, markets and products to see where risks may be building up, the threat of systemic risk remains elevated.
As a follow up to the G20 Seoul Summit in November, 2010, which called for a new financial regulatory framework, The Financial Stability Board (FSB), in conjunction with the Basel Committee on Banking Supervision, has proposed certain recommendations on how to reduce the potential hazard posed by Globally Systemically Important Financial Institutions (G-SIFI).
As part of the process, FSB has recently asked for comments on its proposal, Effective Resolution of Systemically Important Financial Institutions. This is a package of proposed policy measures intended to improve the capacity of relevant authorities to resolve G-SIFIs without systemic disruption and exposing taxpayers to the risk of loss as well as a timeline for their implementation. The Basel Committee on Banking Supervision has also asked for comments on its, Global Systemically Important Banks: Assessment Methodology and the Additional Loss Absorbency Requirements. These proposed series of reforms are intended to improve the resilience of banks and banking systems and mitigate the potential negative impacts created by G-SIFIs which current regulatory polices do not fully address.
- Bank for IS Global SIFI Assessment Methodolgy Loss Absorbency
- Bank for IS Interdependecies of Payment and Settelemtns Systems
- Bank for IS Principles for Effective Risk Data Aggregation and Risk Reporting
- Bank for IS Resolution policies and frameworks
- Bank of England Recovery & Resolution Plans CP11 16
- Basel Committee Cross Border Bank Resolution
- Davis Polk Dodd Frank Financial Reform Summary
- Davis Polk FDIC Releases Joint NPR on Resolutions Plans and Credit Exposure Reports
- Davis Polk Financial Stability Act Summary
- Fed SSS Risk Appetite Framworks for IT Infrastructure
- Fed SSS Risk Management Practices 2008
- FSB Application of the Key Attributes of Efficective Resolution Regimes
- FSB Constructs Elaborate SIFI Architecture
- FSB Cross Border Crisis Managment Group
- FSB Final_G-SIIs_Policy_measures_18_July_2013
- FSB Information Sharing for Resolution Purposes
- FSB Recovery & Resolution Planing for SIFI Critical Functions & Shared Services
- FSB Recovery & Resolution Planing for SIFI Effective Resolution Strategies
- FSB Recovery & Resolution Planing for SIFI Recovery Triggers and Stress Scenarios
- FSB Reducing Moral Hazard Posed by SIFIs
- FSB Reducing Relaiance on CRA Ratings
- FSB Resolving SIFIs
- FSB Review on Resolution Regimes – Peer Review Report
As part of the Dodd-Frank Act, Congress adopted a ban on proprietary trading and restricted investment in hedge funds and private equity by commercial banks and their affiliates, the so-called “Volcker Rule.”
The proposals are named after their creator, former Federal Reserve Chairman Paul Volcker. The original proposals prohibited banks from trading on a proprietary basis – trading using the firm’s own funds – for purposes that are unrelated to serving clients. It also would have prohibited banks from owning, investing in or sponsoring a hedge fund or private equity fund. The rule would have also limited the size of financial institutions by market share.
The proposal was introduced after the House of Representatives passed its version of financial regulatory reform. The Senate chose to include the rule in their legislation as it was proposed by President Obama. A revised version of the rule was ultimately adopted by the Congress and was then signed into law on July 21, 2010 by President Obama as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
The final Volcker Rule included in the Dodd-Frank Act prohibits banks from proprietary trading and restricted investment in hedge funds and private equity by commercial banks and their affiliates. Further, the Act directed the Federal Reserve to impose enhanced prudential requirements on systemically identified non-bank institutions engaged in such activities. Congress did exempt certain permitted activities of banks, their affiliates, and non-bank institutions identified as systemically important, such as market making, hedging, securitization, and risk management. The Rule also capped bank ownership in hedge funds and private equity funds at three percent. Institutions have a seven year timeframe to become compliant with the final regulations.
On October 11, 2011, the Federal Deposit Insurance Corporation (FDIC) proposed rules that would implement the statutory Volcker Rule. The rule was co-proposed by the U.S. Department of Treasury’s Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (FRB), FDIC and the Securities and Exchange Commission (SEC). Originally, regulators set January 13, 2012 as the deadline for public comment on the proposed rules. On December 23, 2011, the regulators extended the comment period until February 13, 2012.
- D & B The Business Impact of Basel III
- Risk Basel III Bookings Institution
- Risk Basel III Diva
- Risk Basel III
Derivatives are financial contracts used to manage risk by transferring it from a party that wishes to reduce its exposure to another party that wishes to take on that exposure.
The value of a derivatives contract is dependent upon or derived from one or more underlying assets, such as a commodity, bond, equity, currency, or other reference value such as an interest rate or credit risk.
Derivatives play an important role in the capital markets and the broader economy. Companies in every state use derivatives to protect against risks that are inherent in their businesses. Derivatives are often and inappropriately portrayed as unregulated, arcane, and excessively risky instruments.
Many derivatives fall into the category of over-the-counter (OTC) derivatives, which means that their terms are privately negotiated between two parties rather than traded on an exchange with standardized terms. Examples of contracts that can be traded as OTC derivatives include:
• Forwards – contracts to buy or sell assets at a future date based on a price specified today.
• OTC Options – contracts to buy or sell an asset at a given price within a specified date.
• Swaps – contracts to exchange cash flows on an agreed schedule.
• Credit Default Swaps – contracts where a buyer makes a payment to a seller in return for a promise that the seller will compensate the buyer if a specified credit event occurs.
OTC derivatives offer flexibility in reducing risk exposure. For example, an electric utility can use OTC derivatives to hedge the risk of increases in fuel costs on the specific quantity of fuel it plans to purchase over a period of time so that its customers are protected against rate increases. OTC derivatives also help financial institutions hedge their exposure to credit risk, which then helps the financial institution expand their lending capabilities.
As part of the response to the role that credit default swaps played in the troubles of insurance company American International Group, legislation was introduced in 2009 to increase oversight of the derivatives market. That legislation became Title VII of the Dodd-Frank Act.
Under the Dodd-Frank Act, swaps that are accepted for clearing by at least one central counterparty (CCP) will become required to clear. This means instead of an OTC agreement between two parties, the CCP will step in and buy the swap from the seller and then sell it to the buyer. In doing so, the CCP will take on the responsibility for guaranteeing the contract. Because the CCP will be required to hold large amounts of capital and will be closely monitored, this can reduce the risk that one counterparty default will trigger a chain of defaults in swaps markets. These cleared swaps also will be required to be traded on an exchange or a swap execution facility (SEF) if they are made available for trading.
- SIFMA AMG CFTC Rule 39.13
- SIFMA AMG CFTC
- SIFMA AMG Margin Letter 07112011
- SIFMA Derivatives 05 2013
- SIFMA Fall Conference Internal Audit Presentation 10.21.11
Recovery and Resolution Planning
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