Dodd-Frank: 3 Years of Change and Still No Resolution

By Davis Dixon, Misys plc

Originally published on TABB Forum 

As firms continue to wait for final Dodd-Frank rules, the industry needs to find a balance between leveraging solutions to meet specific regulatory needs and continuing the trend toward system consolidation. 

On July 21 this year, Dodd-Frank celebrated its third birthday, which equates to 1,096 days the industry has been forced to deal with looming mandates. This legislation is the leading driver for many of the operational changes at banks, impacting various parts of their systems, including clearing, trade reporting and margin calculations, trade volumes monitoring, and SEF connections – and that’s with fewer than 40% of the regulations written and implemented! Banks need to minimize disruption and risk caused by compliance, and given the short timeframes allotted, firms are leveraging tactical solutions for each specific requirement in the Dodd-Frank rules to achieve compliance – resulting in a fragmentation of systems.                 

Impact of Siloed Systems  

There are several reasons why institutions in the US are implementing one-off solutions to address specific Dodd-Frank mandates. For example, utilizing standalone and relatively separate systems minimizes the risk of destabilization. Additionally, having a unique solution for each requirement makes it easy for institutions to add these specific pieces in phases. As a result, banks now have multiple systems, more interfaces, an increase of client-specific customizations to packaged technology, and more workarounds – all creating an excess cost and burden.

The banking industry is at a tipping point. It needs to find a balance between leveraging solutions to meet specific regulatory needs and continuing the trend toward system consolidation in order to reap the benefits this process provides. 

As firms in each segment of the financial world seek ways to reduce costs and increase efficiencies, they will need to address this significant issue even though, right now, the priority is to find multiple “quick fixes” to meet each individual mandate. The siloed systems are creating additional manual effort – for reconciliation between them, and to maintain them as the regulations evolve and require new solutions to achieve compliance.

There is operational risk in keeping these systems up-to-date and consistent. Missing a margin payment or failing to report trades correctly could be a major problem. The biggest issue banks face is often associated with consolidating data – checking margin calls if the trades are in multiple systems, deciding what assets to use to settle the margin, or tracking whether a trade has been accepted for clearing so you can determine whether the bank, the counterparty or the Derivatives Clearing Organization (DCO) will report it – all demonstrate the importance of consolidating data and the increased risk banks take when leveraging disparate systems to meet individual regulatory mandates.

Finding the Right Time to Consolidate 

Right now, the US may be at the peak of the fragmented systems phase when complying with Dodd-Frank. However, looking at the industry holistically, this trend varies depending on where the bank operates. In the US, the Dodd-Frank rules are now reasonably stable. If the bank operates under EMIR, there is still work to do. In Asia the situation is even less clear. So while fragmentation may soon be on a downswing for the banks dealing purely with Dodd-Frank, global institutions may still be forced to find the quick fixes for regulatory mandates before having the breathing room to properly de-fragment their systems.

After the immediate rush to comply by the most expedient means possible, organizations will likely begin to take a step back and reevaluate. Globalization complicates banks’ plans because so many of the global regulations, and issues of extraterritoriality, are still being defined. However the Dodd-Frank requirements eventually will be better understood, the impact of other regulations such as EMIR will become clearer, and more specific standards will become established for the industry. At that point, and with less time pressure, banks can review their systems and continue the process of consolidation.