Introduction

The Dodd-Frank Financial Reform Act is the response of the United States to the deepest global recession since the Second World War. The fact that the sub-prime mortgage contagion germinated within the financial services industry, before spreading across entire economies, is reflected in the multi-faceted nature of the Act. When President Obama introduced the Financial Reform Plan in 2009, providing the foundation for the Dodd-Frank Act, he termed it the most sweeping overhaul of regulation since the Great Depression.

Key findings

• Monitoring and Prioritising Developments – Banks are fully aware that the many facets and pervasive nature of the Act will require them to develop specialised processes to implement changing requirements. Two-thirds of banks already have a specialised team devoted to implementing the many new rules and regulations. The remaining third will soon follow suit.

• OTC Derivatives – The majority of participants believe that Dodd-Frank provisions will effectively encourage institutions to clear derivatives centrally, encouraging OTC derivatives to be pushed onto clearing exchanges.

• Proprietary Trading – One of the aspects of the Dodd-Frank Act that is still some way from being finalised involves the proposals from section 619. As is expected then, this is an area where banks are still unsure as to the outcome. Over half of the participants (56%) do not know how events will play out.

• Systemically Important Institutions – Instead of minimising systemic risk, participants believe that the Dodd-Frank Act will instead increase concentration risk in the industry. It is argued that systemically important banks will gain reputational advantages, with customers and investors choosing these as they will receive government backing in times of future peril, and thus, forcing smaller banks out of the market altogether.

Conclusion

There is widespread ambiguity regarding the implications of several reforms in the Dodd-Frank Act. Ongoing political deliberations may well cause further changes to the Act, thereby leaving many banks uncertain as to which proposals will eventually be enforced and which agencies they would need to work with to ensure compliance. Nevertheless, in whichever form the final proposals appear, banks will face immense difficulties in fulfilling all stipulated requirements within the timeframe required.

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