Assessing Impact of the Dodd-Frank Act on Derivatives Markets

by Anshuman Jaswal, PhD, October 1, 2010
Industry Trends
Global, Asia-Pacific, EMEA, Latin America, North America

Abstract

The Dodd-Frank Wall Street Reform and Consumer Protection Act is a vital piece of legislation that will come into full effect over the next few years. Its impact will be far-reaching, and it is expected to be as important for the financial services industry as the Glass-Steagall Act of 1933.

In this report, Assessing Impact of the Dodd-Frank Act on Derivatives Markets: Change Is in the Air, Celent describes the implications of the Act on the derivatives markets and its leading participants. Already, there have been a number of changes in the regulatory setup, as well as in the structure of the investment banks that dominate the derivatives industry. This report assesses the current impact and possible future developments in light of the Act.

The following table outlines the deadlines for implementation of the various elements of the Dodd-Frank Act. While the FSOC has to be instituted within three months of the enactment of the Act (21 July, 2010), derivatives and clearing regulation has to be implemented within 12 months, and the Volcker rule has to be complied with in an 18-month period. Hence, the changes discussed would come into being at different points over a two-year timeline.

Deadlines for Implementation of Dodd-Frank Act

Timeframe

DFA Feature, Requirement, or Rule

Affected Entities

Effective
Immediately

Resolution authority for orderly liquidation

Federal Office of Insurance (FIO)

Proxy access rule-making

Respective firms that each agency manages, for example

Within Three Months

Financial Stability Oversight Council

Ability to break up firms that pose a “grave threat”

All firms

Within Six Months

Shareholders’ say on pay and golden parachutes

All financial services firms

Within Nine Months

“Skin in the game” risk retention

Banks involved in securitization

Protect small businesses from unreasonable
interchange fees

Retail and commercial banks

Within 12 Months

Bureau of Consumer Financial Protection

All financial services firms

Closure of the Office of Thrift Supervision

Holding companies and thrift institutions

Derivative clearing and swap dealer regulation

Investment banks, clearinghouses, swap trading firms

Mandatory registration of investment advisers

Buy side firms and consumers

Independent compensation committees

All firms

Office of Financial Research (OFR)

All firms

Office of the Investor Advocate (OIA)

Firms and consumers

Within 18 months

Volcker rule

Investment banks, hedge funds, private equity firms

Liabilities cap on large financial firms

Large financial firms

Heightened standards / minimum leverage and risk-based capital requirements

Financial firms, especially investment banks

“Living wills”

“Too big to fail” banks

Remittance error resolution standards

Retail and commercial banks, consumers

Within 24 months

Proposed simplified mortgage disclosures

Lending institutions and consumers

Contingent capital report and rule-making

Large interconnected financial firms

Source: Department of Treasury, Celent analysis

“The Dodd-Frank Act is intended to put in place the regulatory framework for the next decade and beyond,” says Anshuman Jaswal, Celent Senior Analyst and author of the report. “For there to be an ongoing revival in the financial sector, it is crucial that it actually brings about the desired, critical changes in the way the derivatives industry is run.”

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

3

Introduction

6

Overall Impact on the Financial Services Industry

7

 

Direct Impact

7

 

Second-Order Effects

9

 

A Final Perspective on the Scope of Reforms

11

Derivatives Market and the Dodd-Frank Act

13

 

Impact of the Act on Derivatives Trading

14

 

Proprietary Trading and the Volcker Rule

15

Critique

17

Key Action Areas

19

Leveraging Celent’s Expertise

21

 

Support for Financial Institutions

21

 

Support for Vendors

21

Related Celent Research

22

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