Earlier this month, the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC) released the long-anticipated definition of a swap. As expected by the majority of industry participants, the SEC and CFTC sided with the wording in the Dodd-Frank Act. Although there were no big surprises in the content of the announcement, banks and financial institutions still have a huge amount to contend with on the regulatory front – including registering themselves, complying with compensation rule changes, establishing living wills and of course determining changes to their business strategy – in addition to the newly outlined definition. It may seem that the software changes necessary for this one piece of Dodd-Frank are a small part of the overall picture. However, having the right technology in place plays a big role in being compliant and running an efficient business.
The compliance clock started ticking on July 11, 2012, when the definition was announced to the public, but the onset of the regulations was realized long ago. From our experience, and speaking with our clients, the most difficult element of complying with the new definition is the short timeframe – just 60 days to implement in some cases – setting the deadlines as early as this September.
Much of what banks and financial institutions need in terms of software solutions is available today, however to implement and to test these systems takes more time than is currently at hand. In addition, there are elements of Dodd-Frank to come that will affect areas of the solution previously implemented, e.g. trade reporting will come into effect in September, but the requirement to use legal entity identifiers (LEIs) will come to fruition at the end of the year. This adds additional pressure on firms and further complicates the software update process.
Over the next few months, there will be a huge scramble in the industry, as a multitude of regulations go into effect at different times before the end of the year. The process is akin to buying the latest computer and almost immediately a newer, faster version is available. Similarly, deciding at what time to implement new compliance software when you know there are future regulations, bringing additional changes, adds a level of complexity to any decision. Firms have to draw the line somewhere and the ultimate decision will be made based on different implications at each organization.
In addition, as the deadline is fast approaching, short-term fixes have to be more tactical, while strategic solutions will be implemented down the line. It’s not possible to get everything done at once and firms have their plates full.
Although the SEC and CFTC’s announcement concerns only Dodd-Frank and the U.S. market, the implications are global. As there is a general drive for regulatory harmonization across the world to avoid potential regulatory arbitrage, it would be safe to assume that the rules will look similar across the globe. Therefore, banks and financial institutions need to be prepared to handle similar regulations in other regions.
U.S. banks are well advanced in their planning, and European organizations are close behind, however, in Asia, where there are a lot of different jurisdictions, regulations and deadlines are less certain. We still continue to see little interest regarding the SEC/CFTC definition from firms in Asia. This firstly raises the issue of whether businesses will move to Asia as a consequence of less regulation in that area. The second concern is whether Asian firms are prepared for when the U.S. regulations will take effect.
These are big issues that banks will need to contend with over the next few months. But there is a third consideration. Even before Dodd-Frank there was pressure to globally consolidate software systems; with Dodd-Frank this continues in order to get the benefits of consolidated reporting, increased globalization and to allow greater risk controls. If firms update to comply with this definition in a hurry, they risk ending up with ad-hoc systems to meet the requirements of various regions versus deploying a unified and efficient infrastructure.
Originally published by http://tabbforum.com