Capital Markets Gird for Regulatory Reforms

Terry Flanagan

With the clock ticking on Dodd-Frank implementation, firms across the capital markets spectrum are preparing for a new wave of regulations and enforcement actions.

As of November 1, a total of 237 Dodd-Frank rule-making requirement deadlines have passed, comprising 60% of the 398 total rule-making requirements, according to law firm Davis Polk’s Regulatory Tracker. Of these 237 passed deadlines, 144 have been missed and 93 have been met with finalized rules.

Of the 398 total rule-making requirements, 133 have been finalized, while a similar number, 132, have not yet been proposed.

“We continue to see buy-side firms, especially new registrants, continuing to be concerned about an increasingly vigilant and empowered Securities and Exchange Commission,” said Beth Lehman, manager in the investment management regulatory practice at accountant KPMG.

Last month, the SEC reported that 1,504 advisers to hedge funds and other private funds have registered with the agency since the Dodd-Frank Act, which promises sweeping reforms to Wall Street, mandated such registration.

Including the 2,557 private fund advisers who had registered previously, a total of 4,061 advisers to one or more private funds are now registered with the SEC.

A total of 11,002 investment advisers now are SEC-registered, with 37% advising hedge funds and other private funds.

Many new registrants will soon undergo a so-called “presence examination” by the SEC’s examination staff.

“New advisers can expect the SEC to conduct a focused, risk-based examination of the registrant’s compliance program concentrating on the adviser’s policies and procedures governing its marketing, portfolio management, custody, and valuation activities and controls,” said Lehman. “The SEC also makes clear that presence examinations will include meetings with a new registrant’s senior officers with compliance-related responsibilities.”

Dodd-Frank derivative reforms as well as Basel III are expected to individually cost between $150 million and $350 million per firm for tier one global banks, according to a study conducted by research firm Celent.

According to the study, over half of senior executives at tier one financial institutions believe that performance and risk measures must be brought into line with the front office in order to achieve better trading decisions, stronger controls and an accurate picture of profitability, while 80% of tier one firms are looking to achieve tighter alignment with risk technology and operations in relation to front-office processes at an enterprise level.

“With the advancing regulatory legislation, financial institutions are beginning to recognize the weight near-real time and accurate risk infrastructure holds within the front office,” said Stuart Grant, financial services business development manager at SAP, a software vendor. “Allowing the trading desk to employ risk controls that are industry and regulatory compliant will require investments in technology, risk strategy, innovation and culture change.”

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