Banks Put Freeze on Projects Amid Regulatory Uncertainty
A lack of clarity on regulations is causing banks to place new projects on hold until the issues are sorted out.
“It creates a ‘wait and see’ situation where non-critical initiatives and large strategic moves are put on hold,” said Max Dufour, principal at SunGard Global Services.
“At the same time, many small projects are initiated to scope out the data requirements and initial work which can be done in preparation for larger implementations supporting compliance, scoping out additional initiatives which will be necessary,” Dufour said.
In the past week, the SEC and CFTC have finalized their definitions of terms such as “swap,” “swap dealer,” and “major swap participant.”
Paradoxically, the final rulemaking on definitions has seemed to muddy the waters by setting in motion a chain reaction of implementations of rules that were dependent on these definitions.
An example is the CFTC’s proposed rulemaking on aggregation of positions in swaps and futures.
The rule was issued in response to a petition by the Commercial Energy Working Group, seeking relief from aggregation requirements in the CTFC’s rule on position limits for derivatives.
“While we appreciate the Commission’s attempt to address one of several serious deficiencies in its Position Limits Rule, it must be recognized that the proposed aggregation rule purports to amend only a portion of a rule that is fundamentally flawed,” the International Swaps and Derivatives Association said in a June 29 comment letter.
The Position Limits Rule imposes limits on futures and options contracts in 28 exempt and agricultural commodities and their economically equivalent swaps, and includes provisions that dictate when a trader must aggregate positions held in multiple accounts.
The Position Limits rule was promulgated without finding that position limits were necessary or appropriate, ISDA said.
The largest banks could spend as much as $500 million a year on Dodd-Frank related activities, according to Dufour.
Once budgeted, this capital is earmarked and not available for other strategic initiatives.
“If this money is spent as planned, banks will need to find new revenues or new cost savings to maintain their current profitability,” Dufour said.
“The lack of regulatory clarity has clearly impacted the merger and acquisition activity in the financial services sector, as participants have been focusing on reorganizing and moving entities impacted by the rules, especially on the proprietary trading and alternative investment sides,” he said.
It would not be surprising if the processes and rules were refined and simplified over time, so that the goals of the regulations are aligned with the new requirements added to the financial institutions agendas.
“We will start seeing frameworks and methodologies emerge, which will help with understanding and implementing the rules – providing all parties which the much needed clarity – without having to decipher 10,000 pages of regulations,” Dufour said.
The 10-year deal covers financial and commodity derivatives.
The calculations specify the MiFID II transparency regime for non-equities.
Electronic trading continues to increase across all asset classes.