Friday, May 4, 2012

Dodd-Frank: many consequences extraterritorial

This is easily understood is stated clearly and concisely. This is not the case of Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted by President Obama July 21, 2010.

Along more than 2300 pages, the text aims to be a major reform of U.S. financial markets right - just like those that followed the 1929 crisis - by addressing all the issues identified in the United States during the financial crisis:

 "To Promote the Financial Stability of the United States by Improving accountability and transparency in the Financial System, to end 'too big to fail" to protect the American contribute by ending bailouts, to protect Consumers from abusive practices financial Services, and For Other practical purposes. "

This is the title of reform. This is based on sections 16 declining a multitude of measures that can be grouped into four major components:

    Prevent systemic risk
    Regulate derivatives markets
    Improve transparency
    Enhance consumer protection

Beyond the fact that it is the first major text to be adopted at a national level, the Dodd-Frank Act interested the financial community, regulators and especially the EU, because of its impact offshore:

    First, some measures can be applied directly to non-US players. The impact of Dodd-Frank on the construction industry and European regulatory occurs particularly along three axes of the present workings of the reform:

        prevention of systemic risk;
        regulation of OTC derivatives markets (Over The Counter or over-the-counter);
        and regulation of asset managers and hedge funds.

    Secondly, the relationship between existing regulatory frameworks and emerging on both sides of the Atlantic should be monitored.

Prevention of systemic risk

In the U.S., the Dodd-Frank Act established the Financial Stability Oversight Council (FSOC), responsible for identifying, assessing and addressing risks related to financial stability. The legislation gives the FSOC the power point the finger at non-bank financial institutions - American or foreign - must be considered to pose a systemic risk to the United States. These institutions must be registered with the Fed and subject to prudential rules strengthened. The functions of FSOC well beyond U.S. borders extending to the non-bank financial institutions which are registered in a country outside the United States and engaged, including through a branch in the United States, in financial activities predominantly.

The United States is not alone in recognizing the need to create an international body regulators responsible for identifying, evaluating and controlling systemic risk. In Europe, the European Systemic Risk Council (ESRC) is responsible for monitoring and analyzing the risks to the financial system as a whole. Dodd-Frank provides for consultation with local regulators by the FSOC, which will be particularly obliged to investigate to what extent the establishment concerned is already subject to comparable standards.

Regulation of the OTC derivatives market

Another major reform Dodd-Frank is the regulation of derivatives markets over the counter. First text to regulate these markets, the U.S. law poses different sites and principles:
  •  Overhaul of key definitions in the derivatives sector, with a view to increased standardization.

  •  Introduction of a centralized clearing mandatory for certain categories of derivatives. It belongs to the SEC [2] and the CFTC [3] to specify the categories of derivatives should be subject to this scheme.

  • Reporting obligations to central databases and transparency obligations vis-à-vis the market. Under the Dodd-Frank, the parties to a transaction of over-the-counter on a derivative must declare the contract with a clearing house or with a central database. This declaration must be made in real time for transactions on swaps, subject to or without compensation, in order to publicize prices and volumes as soon as possible after the transaction.

  • Impact on Asset Managers and Hedge Funds

Another example of extraterritoriality of the Dodd-Frank, Title IV of the reform includes provisions to regulate the activity of asset managers by imposing obligations including recording and reporting from one of two federal regulators. The exemption previously granted to foreign managers disappears almost completely.

Status at Date

Announced the earthquake has not yet occurred. Most of the 393 rules that were to take effect last summer are suspended, the regulators have not succeeded in meeting the milestones. At April 2, nearly two years after the passage of the law, only 25% of them have been finalized and the vast majority of deadlines were exceeded

From the perspective of the objectives as principles, U.S. law and the current proposals within the EU - such EMIR - are in phase. However, the rules are not yet fully specified, how these regulations will focus remains unclear.

As such, the Volcker rule "raises a number of concerns and may have implications disproportionate to the objectives it intends to achieve," says European Commissioner Michel Barnier, noting that U.S. regulations with extraterritorial impact should also expanded not be implemented without international coordination.

As such, Dodd-Frank includes provisions quite innovative, such as consultation of foreign authorities. This provision stipulates that U.S. federal regulators have a duty to coordinate with foreign regulators for establishing international standards consistent. It is up to European regulators, and more broadly in the financial services industry in Europe, to benefit from these consultations to respond as to how the reform will be declined. Many opportunities to seize in order to avoid, or at minimum to stigmatize, some aspects that are too offshore.