The Dodd-Frank Act at two years old

Birthdays provide an opportunity to look back and look ahead. Dodd-Frank is now two years old. Looking back, we can report that 129 rules have been finalised. And looking ahead, we can see that another 137 proposed rules await completion. Perhaps more importantly, 134 rules have yet to be tackled. So, before we help ourselves to birthday cake, it might be helpful to describe in a bit more detail where we think things stand.

We have a fair bit of insight regarding the oversight of systemically important financial institutions, and the resolution scheme for these entities. But regulators have not identified the non-bank entities that will be subject to oversight. We only recently learned more about the proposed implementation of Basel III in the United States. The regulatory framework affecting derivatives has begun to take shape: product definitions and entity definitions have just been finalised.

Despite this progress, many of the most significant questions remain unanswered. Largely, these relate to the mortgage market and the future of securitisation in the United States. Perhaps this is understandable given that the regulations that are pending will have the broadest impact on average Americans. The most controversial aspect of securitisation reform, the risk retention rule, remains in the proposal phase. The other big piece of securitisation reform, proposed revisions to Regulation AB’s registration, disclosure, and reporting requirements for asset-backed securities and other structured finance products, remains on hold while the SEC focuses on meeting pressing Dodd-Frank rulemaking deadlines. Federal banking regulators, acting jointly, introduced risk-based capital guidelines and alternatives to credit ratings for securitisation positions that will apply high capital requirements to the subordinated tranches of a securitisation that are the first to absorb losses. Capital rules seem to favour plain vanilla residential mortgage loans over more complex loan structures. The Volcker Rule, as proposed, would prohibit or restrict the ability of banking entities to retain an ownership interest in, or sponsor, certain securitisation transactions; and impose burdensome compliance requirements on such entities. A number of uncertainties also remain in terms of the applicability of various provisions of Title VII to the derivatives activities of securitisation trusts.

While on the subject of Dodd Frank uncertainties, it should be noted that the most significant uncertainties are likely to arise out of the cost-benefit analysis being rehashed by the relevant Congressional committees. This review may result in some efforts to roll back certain provisions perceived to affect the cost or availability of credit.

Listen to our free web seminar on the status of Title VII rulemaking on September 6 at GMT 4pm. Panelists will discuss entity definitions, swap dealer registration and compliance issues, registration process, business conduct standards and policy requirements, and compliance challenges.