Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act deals with the reporting requirements and restrictions on companies that offer over-the-counter or in-house swaps and security derivative products. Passed into law in 2010, Dodd-Frank has been the focus of a great deal of discussion in the financial community and has created a host of new regulations and reporting requirements for dealers in over-the-counter swaps and derivatives. This Dodd-Frank overview will outline the challenges facing financial firms in the new regulatory climate.
What Is Dodd-Frank?
The Dodd-Frank Act comprises 16 sections and provides increased oversight for financial transactions and institutions in the U.S. Created in response to systemic failures in the banking sector of the economy, Dodd-Frank outlines a wide range of regulatory changes and increased reporting and compliance requirements that affect investment banks and securities trading firms, insurance companies and consumer lending institutions in the financial marketplace.
Financial institutions face a number of obstacles in managing the reporting requirements for over-the-counter swaps and derivative investments. Some of the most serious challenges include the following 13 issues:
1. A lack of consistency in the reporting requirements in geographically diverse locations and offices can cripple efforts to achieve uniform reporting. Specifically, differences in state and local regulations may impact the reporting strategies in use by offices within the same corporate structure.
2. Varying local processing methods for swaps, derivatives and other investment options can reduce the degree of conformity achievable by companies in the financial services marketplace.
3. Determining the responsibility and ownership for specific reporting requirements can be challenging in complex organizations. When responsibilities are shared among a number of individuals, assigning the reporting requirements for swaps or derivative products can present significant difficulties for management.
4. Increased reporting and data storage requirements may necessitate the acquisition of upgraded hardware and software systems to accommodate an increased drain on IT resources and corporate bandwidth. This is especially true in cases in which trade reconstruction activities are required under Dodd-Frank summary regulations.
5. Within some corporate structures, establishing the functional ownership of and responsibility for derivative products and swaps may require revised workflows or sales models.
6. Data gaps can delay or distort reporting for complex swaps and derivatives in the financial marketplace. Unstructured data may require additional time and effort on the part of analysts to produce usable information and relevant reports.
7. Trading activities may take place in a wide range of venues and through a variety of communication methods. Emails, telephonic contacts, faxes and face-to-face meetings can generate reportable transactions; however, no comprehensive strategy for collecting and collating these disparate contacts has yet been established in most companies.
8. International swaps and derivative transactions may not be performed in accordance with domestic company policies and reporting requirements.
9. The learning curve for new reporting and data collection procedures can represent a significant drain on productivity and may increase workloads considerably among key corporate staff and line employees.
10. Compiling and integrating data in a variety of formats may require new technological tools and strategies to ensure the most efficient use of human resources in the corporate environment.
11. Language barriers and translation difficulties can present serious challenges in managing written communications and transaction records for international investment firms and swap dealers.
12. Verbal communications may also present reporting difficulties for companies that engage in frequent transactions and trades with individuals and businesses in foreign locations.
13. Email and voice recording technologies can vary widely from one country to the next, creating obstacles to smooth integration of these data arrays into the company's existing information storage solutions.
These challenges will play a significant role in shaping the activities of financial firms in the new regulatory environment. The data provided to government agencies under Dodd-Frank will be instrumental in determining the federal response to impending failures in the financial sector and may reduce the risk of future recessions due to unsafe practices in the securities field.
Achieving Dodd-Frank compliance is likely to be a driving force for many over-the-counter swap dealers and other companies subject to this new legislation. Consultants and other resources can help with solutions specifically designed to address these challenges and to manage risk in the modern financial marketplace.