Dodd Frank: The Start of Many Cross-border Regulatory Requirements?

The
US’s Dodd Frank Act (for example, Title VII), which officially has an impact on
three kinds of financial institution (FI), is a prime example. The companies
belonging to the first category of the directive are those organisations located
in the US; second is any institution that has executed a swap within the US,
even where they are not US-based; third is any swap that was registered or
cleared within the US. Dodd Frank, which requires a series of reports that need
to be made available, is also applicable for most FIs with trade activities with
the US.

This globalisation of regulations has impacted mostly on
investment banks and trading desks within conglomerates but has extended even to
organisations such as energy companies trading in commodities. This provides
many questions which need to be carefully examined by any affected
organisations, such as:

  • Are they prepared to do the necessary additional
    reporting?
  • Are their systems ready to accommodate the new complex
    reporting demands?
  • Are they aware they should look at disclosures in a
    more international way?
  •  How will they solve these requirements in a cost
    effective way?

Ultimately, these questions boil down to one; should an
organisation opt for a ‘patch’ solution or should they take the time to invest
in a scalable solution?

Title VII of the Dodd Frank Act creates
problems for different institutions in the sense of the collection of data from
different systems. However this issue was already in evidence when some of the
Financial Accounting Standards Board (FASB) or International Accounting
Standards Board (IASB) rules were implemented. The organisation has the choice
between again hiring a battery of consultants for making the necessary data
interfaces, or the creation of a data mart for Dodd Frank. The alternative is to
go for a scalable solution which unifies the different data in ‘one single
version of the truth’ and to make it available for any future additional
disclosures. This is the choice that organisations face every time.

Short-term Fixes

The problem lies in the fact that the short term
‘patch’ is typically much cheaper and easier than the strategic solution.
However, in the long run this option can create a convoluted junction of
systems, potentially leading to a longer throughput time and less transparency.
This is also the result of short -term budget cuts leading to long-term budget
overruns which are structural.

Experts should take a step back and
analyze from a distance to actually see the results of these ‘additional
disclosures’ and how they lead to opposite objectives. Every new regulation
claims when introduced to improve transparency and reporting for stakeholders of
the organisation, yet instead more complex system architecture and endless
manual updates and user interferences are creating the opposite effect. Is more
information always for the better, or is less volume but higher quality and
transparency the optimum level?

On top of the additional disclosures
required, an increasing number will have to be available in real time. For swaps
Dodd Frank requires that trades should be handled directly within accounting –
so far as technology allows – providing oversight of the impact. The creation of
market-to-market valuations in order to calculate unrealised and realised profit
and loss (P&L) to immediately see the impact is important. How can a ‘patch
solution’ be real time, or even near real time? A second reason for why a
strategic and scalable solution should be the preferred option for these
organisations is not only the reduction of costs in the long run but the benefit
of being prepared for all regulations and demands to come.

Dodd Frank
is just the beginning. Will other great economic powers such as the European
Union (EU) and China also come up with their own cross border regulation or will
they be internationally aligned? Other disclosures are becoming more severe and
will demand more skills and time from the preparers. The move from information
consuming pushed by the regulators to a situation in which those assets can be
deployed for analytical and strategic decision will be allayed by choosing a
strategic solution.

Whether it is Dodd Frank, International Financial
Reporting Standards (IFRS) or Financial Accounting Standards (FAS) compliance is
something which is inevitable, but opting for a strategic or an ad-hoc solution
will determine how well organisations can adapt to new compliance
requirements.                                                                                                                                        

10 views

Related reading