Dodd-Frank implementation in sight at RMA conference
14 October 2011 Naples RMA
Image: Shutterstock
This year’s Risk Management Association (RMA) conference, which ran from 10 to 13 October in Naples, Florida, is the last before the Dodd Frank Act is to be implemented and reviews are mixed on the sweeping regulatory reform which is shaking up traditional securities lending markets’ business models.
Almost as if on cue, the 300-page Volcker rule was released during the week by five coordinating regulatory bodies in the US and, as expected, securities lending desks which provide “bonafide liquidity management” are exempt from the definition of a trading account.
But it is the cumulative impact of legislation, such as Dodd-Frank and Basel III, on the securities lending industry’s bottom line that is the concern. So too, is the increasing amount of workload for the RMA and the Securities Industry and Financial Markets Association (SIFMA) as more regulations keep coming and more Dodd-Frank rules are yet to be finalised before the 12 July deadline next year.
“There are a lot of mandates that the Securities and Exchange Commission and Federal Reserve feel empowered to execute. RMA and SIFMA are working on five to seven mandates when last year we were working on three and that is a lot to keep up with, this is an unprecedented time in history,” says Christopher Kunkle, managing director at RMA.
Additionally, cost of capital and leverage charge issues are being contemplated at the Federal Reserve (FRB) level and have to either be worked through or better understood.
“If I am indemnifying an agent lender from broker-dealer default, I basically have access to the collateral…if I have to cover the claim…[and] that portion goes on balance sheet…let’s just say banks don’t want a business that has a high cost of capital,” he says.
“If things don’t change, rates stay flat, earnings will stay flat, but we have to get through all this regulation and help everyone understand how it does and doesn’t affect [the securities lending market]…I think the regulators will do their best to deliver Dodd-Frank on time, but what will it look like?” he adds.
Some future-forward topics were discussed as well. Backed by research, market participants questioned whether the SEC might begin to consider allowing equities as collateral in the US market as the industry faces increasing collateral costs and stiff competition from Europe, where the practice is common. But Kunkle thinks it is doubtful the SEC will take a look before Dodd-Frank is out of the way and the regulator takes a breath.
Meanwhile, a CCP panel highlighted the chasm between lenders and borrowers on the entry of clearing houses, indicating there is more work to be done. Although there was widespread agreement among agent lenders and borrowers that some transactions should go through a CCP, the vast majority of agent lenders did not believe mutualisation decreased risk while borrowers veered the other way. At the same time, there was general agreement that CCP transactions should have a lower regulatory capital requirement.
Almost as if on cue, the 300-page Volcker rule was released during the week by five coordinating regulatory bodies in the US and, as expected, securities lending desks which provide “bonafide liquidity management” are exempt from the definition of a trading account.
But it is the cumulative impact of legislation, such as Dodd-Frank and Basel III, on the securities lending industry’s bottom line that is the concern. So too, is the increasing amount of workload for the RMA and the Securities Industry and Financial Markets Association (SIFMA) as more regulations keep coming and more Dodd-Frank rules are yet to be finalised before the 12 July deadline next year.
“There are a lot of mandates that the Securities and Exchange Commission and Federal Reserve feel empowered to execute. RMA and SIFMA are working on five to seven mandates when last year we were working on three and that is a lot to keep up with, this is an unprecedented time in history,” says Christopher Kunkle, managing director at RMA.
Additionally, cost of capital and leverage charge issues are being contemplated at the Federal Reserve (FRB) level and have to either be worked through or better understood.
“If I am indemnifying an agent lender from broker-dealer default, I basically have access to the collateral…if I have to cover the claim…[and] that portion goes on balance sheet…let’s just say banks don’t want a business that has a high cost of capital,” he says.
“If things don’t change, rates stay flat, earnings will stay flat, but we have to get through all this regulation and help everyone understand how it does and doesn’t affect [the securities lending market]…I think the regulators will do their best to deliver Dodd-Frank on time, but what will it look like?” he adds.
Some future-forward topics were discussed as well. Backed by research, market participants questioned whether the SEC might begin to consider allowing equities as collateral in the US market as the industry faces increasing collateral costs and stiff competition from Europe, where the practice is common. But Kunkle thinks it is doubtful the SEC will take a look before Dodd-Frank is out of the way and the regulator takes a breath.
Meanwhile, a CCP panel highlighted the chasm between lenders and borrowers on the entry of clearing houses, indicating there is more work to be done. Although there was widespread agreement among agent lenders and borrowers that some transactions should go through a CCP, the vast majority of agent lenders did not believe mutualisation decreased risk while borrowers veered the other way. At the same time, there was general agreement that CCP transactions should have a lower regulatory capital requirement.
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