What is it?
The one-year anniversary of the Dodd–Frank Wall Street Reform and Consumer Protection Act, the most sweeping change to financial regulation in the US since the Great Depression.
The complexity of Dodd-Frank means that US law makers are struggling with their gargantuan task. A report from law firm Davis Polk published in July reveals that 14 regulations were finalised in June – and six additional requirements to existing rules were proposed – suggesting that regulators will find it hard to manage the 122 rules with a deadline between 16 and 21 July (Dodd-Frank’s actual birthday).
The tally so far: 121 proposed rules; 38 finalised rules; 26 missed deadlines; 216 rules still to come.
What do the regulators say?
Commentators suggest that one of the reasons for the slow pace of rule-making is because of the additional complexity represented by the 'extraterritoriality' of the act.
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- Background: The failures of the Dodd-Frank bill
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Dodd-Frank represents a huge change in the American financial regulatory environment, affecting all Federal financial regulatory agencies and almost every aspect of the country's financial services industry. The problem is that Dodd-Frank is so far-reaching that it affects just about every other legal and regulatory jurisdiction and all of their financial entities as well.
This has ruffled feathers around the world. Regulators in Europe and Asia have voiced their concerns about the long arm of Dodd-Frank. At a conference in May, Paulina Dejmek, a member of the cabinet of Michel Barnier, the European Commission’s internal market and services commissioner, said: “[The EC is] not happy with [the extraterritorial application of the Dodd-Frank Act] and this is something we are discussing closely with our US counterparts.”
What’s the problem?
There may be plenty of discussion, but regulatory specialists say little headway has been made in deciding where one jurisdiction ends and where another begins, or in determining what to do when financial activities inevitably overlap.
“It’s not that people don’t want to co-operate, it’s just that it’s so complicated – and made more so by the fact that law makers answer to their own congress and nobody else’s,” says Doug Landy, head of the US financial services regulatory practice at law firm Allen & Overy.
Eight international industry bodies* are so concerned about the extraterritorial effects of EU and US regulation of derivatives that in July they wrote to Mr Barnier and the US Treasury secretary Timothy Geithner.
Their joint letter says that regulation in different G-20 jurisdictions may be creating conditions that will lead to fragmentation of markets, protectionism and regulatory arbitrage. The letter states that the proposed US rules, and those currently being debated in the EU, leave the global derivatives business riddled with ambiguity and legal uncertainty.
The concerns cover five main areas: licensing, authorisation or registration rules; potential overlap and conflict in the regulation of derivatives-market participants in foreign jurisdictions; discrimination in dealing with sovereigns; rules for central counterparties; and trade repositories.
What are the main issues?
An example of the difficulties that can be caused by regulatory overlap and conflict is the extraterritorial application of margin requirements to non‐US subsidiaries, branches or affiliates of US financial services institutions, meaning these entities will face dual (and possibly conflicting) regulatory requirements. Similarly, says the letter, non‐US firms have concerns about their US subsidiaries, branches or affiliates facing dual (and possibly conflicting) requirements in the US and in their home jurisdiction.
Another area highlighted is the lack of agreement over the standards for 'equivalence' or recognition of central counterparties in each others’ jurisdictions. Equivalence is critical for rules on clearing, as conflicting clearing requirements would be impossible to comply with if the rules of each of two different jurisdictions require a trade to be cleared in its jurisdiction.
The impact of extraterritoriality goes way beyond the application of derivatives rules. There are dozens of points of contact between the application of Dodd-Frank and laws outside the US.
A&O's Mr Landy says: “We've broken them down thematically into areas such as those which may affect business structures, such as the Volcker Rule or the swaps push-out rule; regulatory and supervision laws, which will allow US regulators to look inside a business through examination or reporting, even outside the US; and cost rules, which may require firms outside the US to pay attention to US capital, liquidity or other requirements.”
What does the industry say?
Mr Landy is under no illusions as to the scope of the problem. “In theory, if you are a non-US bank, operating out of a non-US office, with non-US customers, you should be exempt. But if you're writing swaps that touch or materially affect the US, then you could be affected. Businesses are so intertwined that it is virtually unthinkable that a bank can seal off its non-US business. The US is the largest market in the world and it's almost impossible to run a desk without having an interface with the US.”
*The eight international industry bodies are: the Alternative Investment Management Association; the European Banking Association; the Futures & Options Association; the Global Financial Markets Association; the Investment Management Association; the International Swaps & Derivatives Association; the London Energy Brokers' Association; and the Wholesale Market Brokers' Association.
