By Walter Ferstand, Sales Compliance Subject Matter Expert at IPC for Traders – first published May 11, 2017
While talk of repealing the Dodd-Frank Act has been at the fore of regulatory rollbacks vowed by the new U.S. administration, in most financial industry circles the sentiment is that a wholesale dismissal of the regulation is unlikely. And though parts of the legislation are being targeted – ostensibly to recalibrate bank lending thresholds and protections under the Consumer Financial Protection Bureau – for millions of regulated market participants, the ship has sailed regarding ethical guidelines, communications standards, record-keeping and data compliance.
The Dodd-Frank Act is often referenced as the post-2008 financial crisis law that, by defining dealer conduct standards, recordkeeping and reporting requirements and mandating trading on regulated exchanges, swap execution facilities and two-party transactions via clearinghouses, lowers risk and costs for businesses, consumers, and strengthens confidence in the market. So what are financial firms and regulated participants to make of this repeal talk? Even if changes were to include trading guidelines, for good reason, for most global financial firms it would (and should) be business as usual.
To better understand where we currently find ourselves with Dodd Frank it’s worth a brief visit through history of the financial markets and the different regulations that have been enacted. Absent a Dodd-Frank Act and immediately following the 1929 stock market crash, to avoid a casino-like environment, boost market integrity and protect investors, the U.S. federal government enacted rules for compliance and mitigating risk through a slew of then-new legislation such as the Glass Steagall Banking Act of 1933, which held that commercial banks were no longer allowed to underwrite or deal in securities, while investment banks were no longer allowed to have close connections to commercial banks. Further, the Securities Act ensured issuers selling securities to the general public disclosed material information to investors and that securities transactions are not based on fraudulent information or practices, while the Securities Exchange Act of 1934 directly regulated the markets on which securities are sold and their participants. Lastly, the Investment Company Act of 1940 outlined investment company functions, structure, accounting recordkeeping, auditing requirements, transactions among affiliated persons and the redemption and repurchase of securities.
Fast-forward to 2010, the Dodd-Frank Act comprehensively reformed the regulation of swaps, which invariably helped accelerate the development of electronic trading within U.S. jurisdictions as we know it today. As such, while the pace of regulatory progress has differed from asset class to asset class, a universally applicable consequence of this new market structure is an increased reliance on data and technology.1 For its part, the U.S. is shifting to shortened settlement cycles — as with the move this fall to trade plus two business days – and real-time surveillance, all of which further mitigate operational and system risk. Organizations such as the Financial Industry Regulatory Authority (FINRA), National Futures Association (NFA) and the Commodity Futures Trading Commission continue to empower the financial markets to self-regulate and penalize member firms when they violate agreed-upon industry rules and regulations. In yet another tightening of regulatory oversight, the CFTC moved surveillance functions such as monitoring for suspicious trading patterns that may indicate fraud or manipulation to the Division of Enforcement, while surveillance of trading activity for significant market developments and other information will remain with the Division of Market Oversight under a newly created market intelligence branch.2
Though regulation repeal is being bandied about within the highest levels of government, with regulators like the CFTC increasing its focus on market development and data analytics, financial firms in the U.S. and abroad know they must continue to enforce the long-standing regulations already in place. What’s more, regulators outside the U.S. influence how financial firms are doing business globally. That’s one reason why evolving political climates and the prospect of a Dodd-Frank diminishment are not necessarily deterring compliance decisions for 85 percent of C-level financial firm executives, according to recent studies. To illustrate, U.S. firms that fail to keep up with global requirements for record-keeping under the European Union’s forthcoming MiFID II regulation, for example, would be at a disadvantage if called to defend themselves without the proper supporting data, and risk potentially incurring millions of dollars in fines and irreversible damage to their reputation. Given this environment, it’s not surprising that financial firm leaders are most concerned about compliance culture and professional conduct concerns (89 percent), understanding rules and regulations (87.3 percent), and implementing new regulations (86.4 percent).
Repeals of financial regulations or aspects of Dodd-Frank may or may not be on the horizon. In the meantime, as regulators become increasingly savvier on how to remain relevant and impactful in their oversight, surveillance happens instantaneously and regulation continues to increase. As a result, having a holistic approach to wrangling a financial firm’s data across every area of its business and automating that function will be critical. Whether doing so in order to comply with regional or global rules or be an ethical, transparent corporate citizen, an active overview of your firm’s compliance efforts is guaranteed to gain deeper insights into how your company communicates, discover efficiencies in how it operates and ultimately gain ground competitive ground in the marketplace.