The most sweeping attempted reform of the financial markets was signed into law on July 20th, 2010. Known as Dodd Frank, this 1000 plus page document will forever alter the financial landscape in the United States. Many traders and other financial professionals are quite concerned about what impact this new legislation will have on their way of life. Already, the enactment of the legislation into law has caused much stress on the SEC and CFTC. In fact, the already overworked SEC has missed over three quarters of its Dodd Frank rule making deadlines. The CFTC has fallen behind on 88% of its deadlines. What this means is it will likely be a while before any of us actually experience changes under Dodd Frank.
The way regulatory oversight is handled under Dodd Frank may be the most obvious change for financial professionals. Mid-size investment advisors, those with $25 to $100 million under management, will shift to state oversight in states with regular exam programs. Overall, about 3200 firms will be moved from federal to state oversight. The idea to remove some of the pressure off the SEC is noble, but the truth is, the act ends up adding 1800 firms to the SEC’s stable. Many of these 1800 are far more complex, therefore difficult to manage than the smaller firms being taken over by the states. According to former SEC general counsel and current partner at law firm Cleary Gottlieb Steen & Hamilton LLP, “The shift of many midsize investment advisers from SEC to state supervision is nowhere near enough to offset all the extra responsibilities the agency faces under the new regime.”
The Dodd Frank act’s primary purpose is to mitigate systemic financial risk. Therefore the focus of the act is not on individual traders or other financial professionals. It targets issues like regulatory consolidation, banking standards, a new way firms like Bear Sterns and Lehman Brothers can be wound down outside of the archaic bankruptcy laws, and liability limits on large financial firms and banks.
Some of the regulatory changes will filter down to the capital markets, thereby affecting traders. Primarily, this will alter the way OTC derivatives are traded. The present market is generally unregulated and Dodd Frank will require federal oversight. The oversight will be divided between the SEC and the CFTC with trades being required to be cleared via central clearing agencies. Next, the Volcker rule will prevent banks from running proprietary trading operations. It will also limit the amount of funds banks can invest in hedge funds or private equity funds.
While most of these changes will have minor effects on most of us, perhaps the most impact will be felt by the proposed Office of Financial Research. This new agency will collect all individual financial transactions and position data from firms. This level of control is unprecedented in the US financial markets. Although the intentions may be noble, the potential for abuse is very high with such an agency. Financial professionals need to be on their guard.
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