Dodd-Frank Leaves Firms in Limbo

Terry Flanagan

The Dodd-Frank Act is one of the largest collections of regulations ever mandated for the financial services industry. What began as an 848-page bill now encompasses over 10,000 pages of regulations. The implementation of these rules has not been easy, as over 60% of the deadlines have been missed.

“The magnitude of the Act, the missed deadlines and the evolution of the actual regulatory requirements has delayed the planning and implementation of robust technology solutions,” said Henry Hilska, director of the strategy practice at Virtusa, an IT services company. “This has led to more tactical remediation approaches while banks wait for the other shoe to drop.”

As of December 3, a total of 237 Dodd-Frank rulemaking requirement deadlines have passed, according to law firm Davis Polk’s Dodd-Frank Progress Report. Of these 237 passed deadlines, 144 (61%) have been missed and 93 (39%) have been met with finalized rules.

In addition, just 133 (33.4%) of the 398 total required rulemakings have been finalized, while 132 (33.2%) rulemaking requirements have not yet even been proposed.

Although no rulemaking requirements were met in November, there was a flurry of regulatory activity in the form of no-action relief and other guidance, particularly by the Commodity Futures Trading Commission with regards to Title VII implementation.

On November 29, the CFTC provided relief in the form of a no-action letter from commodity pool operator (CPO) registration for family offices and fund of funds operators.

To the extent that a pool operator will avail itself of this no-action relief, it should prepare the relief submission now, so that it may be submitted prior to the December 31 deadline.

The CFTC has left in place the exemption available under Rule 4.13(a)(3) for CPOs engaged in a ‘de minimis’ level of futures trading (no more than 5% of the liquidation value of the fund’s portfolio is used to establish futures trading positions or the aggregate net notional value of such positions does not exceed 100% of the liquidation value of the fund’s portfolio).

The Dodd-Frank regulation in the U.S. and its equivalent, the Emir regulation in Europe, place a heavy burden on all financial entities through the introduction of important changes across the entire life cycle of OTC derivatives products.

Trading, reporting and recordkeeping will be impacted, with the aim to increase transparency and encourage standardization.

“These regulations introduce new players to the financial market—such as clearing members, swap execution facilities and global trade repositories—with which everyone will need to connect, either directly or indirectly,” said Jerome Lafon, buy-side product manager at Misys Sophis, a provider of risk analytics.

“Those interfaces are costly to develop and maintain, because they employ different formats and methods of connectivity, not to mention the different data requirements, depending on which regulator the firm is dealing with,” Lafon said.

The number of missed deadlines and the numerous changes to the rules has also created a level of uncertainty.

“If the rules are subject to change, the timeline cannot be considered safe; banks already pressured financially are unable to budget appropriate resources to remediate these regulatory issues,” said Hilska at Virtusa. “This uncertainty has helped to increase the number of more tactical approaches throughout many of the banks.”

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