In the fall of 2008, a series of large financial institution failures triggered a financial and economic crisis that threatened to freeze U.S. and global credit markets. As a result, significant regulatory changes were put into effect in order to alleviate the systemic risk, poor risk management practices, and lack of supervisory oversight that had expanded the financial industry’s vulnerability in the first place. These changes can still be seen across the globe today.
Financial reform is gradually being implemented through the Dodd-Frank Wall Street Reform and Consumer Protection Act in the US, and through the Markets in Financial Instruments Directive (MiFID) & European Market Infrastructure Regulation (EMIR) in Europe–similar legislation has passed in Asia. In the US the Dodd-Frank Act tackles the once opaque and deregulated OTC derivatives market through Title VII, which introduced sweeping new requirements for financial services firms. These new requirements include swap data reporting to regulators and mandatory clearing through regulated central clearing organizations.
Dodd-Frank poses many challenges for financial service providers, including compressed timelines and rapidly changing requirements. Penalties for non-compliance can be severe. Firms who can build to scale, develop a globally consistent design, and equip their employees for change can meet initial regulatory deadlines, avoid non-compliance penalties, and reduce costs associated with a global roll-out. Some best practices for firms to consider are:
• Take a leadership role and drive industry consensus on issues where rules may be unclear.
• Provide a single view of all related Dodd-Frank projects for your organization, and understand how they will impact your systems and processes.
• Build a solution that is scalable and consistent across asset classes, products, and regions.
• Work with platforms and derivatives clearing organizations (DCO s) well in advance of compliance deadlines; when possible, avoid relying on third-party vendor solutions to minimize delays.
Check out North Highland’s latest case study, which includes valuable insight on best practices for Dodd-Frank implementation.