This upcoming July 2013 marks the third anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act, a bill that consists of 848 pages of legislation aimed at consumer protection. The Dodd-Frank legislation continues to be in effect. Organizations impacted by this legislation have spent millions of dollars to date, and the cost of the regulation has been a hot topic of discussion. Nevertheless, the 2008 Financial Crisis has demonstrated the need for enhanced securities regulation, as big firms like Lehman Brothers and Bear Stern collapsed and taxpayers’ money was used to provide massive bailouts.

The Dodd-Frank legislation has empowered regulators to reduce risk in the financial system. In general, regulators have been demanding that the system’s rules be updated to correspond with the new Dodd-Frank regulations. In particular, under Dodd-Frank Title VII , the U.S. Commodity Futures Trading Commission (CFTC) has been granted additional authority to regulate the registered swap dealers and major swap participants. Throughout the year, the Commission has been busy holding Dodd-Frank open meetings and public roundtables as well as issuing guidance to educate the public about the new provisions.

The reporting requirements for swaps came into effect on 1 January 2013 and CFTC OTC derivatives swaps reporting is one key focus area. Reported OTC derivatives swaps information is publicly disseminated through the Real-Time Dissemination Dashboard: SDR Services, where information is sliced by asset classes: commodities, credits, equities, FX, and rates, all of which can be accessed by the public. As per CFTC rule Part 45, counterparties and clients must have a specific legal entity identifier that is registered, managed and certified through the CFTC Interim Compliant Identifier (CICI) Utility. The cost of the registration is approximately US$200. To ensure that trading activities are not disrupted, all impacted entities are working hard to ensure an identifier is obtained. The intent of the initiative is to manage systemic risk. The securities-based swaps regulatory regime is governed by the U.S. Securities and Exchange Commission (SEC).

In addition, the Dodd-Frank Act adds Section 4s (h) to the Commodity Exchange Act (CEA), which requires swap dealers and major swap participants to adopt business conduct standard rules. The business conduct standards enhance the duties of the swap dealers to their counterparties and govern dealings with special entities. The rules prohibit abusive practices and enhances due diligence and disclosure requirements.

The departure of former SEC chairman Mary Schapiro in December 2012 delayed the finalization of Dodd-Frank Title VI , the so-called Volcker Rule. As we know, the objective of the Volcker Rule is to limit proprietary trading and risky bets. J.P. Morgan disclosed that it had lost more than US$2 billion via derivatives trading in May 2012, and this was the type of incident that many believed would be prevented by enforcement of the Volcker Rule. Yet, enforcement may take a while due to the complications of rules enactments as well as implementation. Meanwhile, Goldman Sachs is reportedly trying to work around the rule, which limits activities in private equity funds and continues the business outside of a formal fund structure (i.e., the company would make investments in a syndicate fashion, where money is not yet pooled together in the traditional way). This is based on the fact that Dodd-Frank does not necessarily limit private equity−type of investments outside of a formal fund structure. How the Volcker Rule will unfold is still an unknown, but the impact on trading activities and business structures is already underway. Stories of proprietary trading desk closures and relocations are seen on the news, and the move of head traders to hedge fund companies has become the norm. For instance, Goldman Sachs reportedly liquidated its positions in the Principal Strategies unit and the global macro unit, and a top global head of J.P. Morgan’s proprietary trading desk left the firm to launch a hedge fund.

2013 is the year of regulatory reform implementations as the Dodd-Frank rules become finalized. Given the Dodd-Frank regulations, the future of the financial industry will definitely be significantly different from its traditional heyday when bankers took home billions of dollars in bonuses and compensation via prop trading. The new norms and rules will create a new culture and will lead to a significantly overhauled financial system where risks, regulations, and compliance oversights will be key.