Interview with Houman B. Shadab, Associate Professor of Law at New York Law School
Houman B. Shadab is an Associate Professor of Law at New York Law School. He is an internationally recognized expert in financial law and regulation whose research focuses on hedge funds, derivatives, and securitization. Professor Shadab is a director of the Center on Financial Services Law and the Editor-in-Chief of the Journal of Taxation and Regulation of Financial Institutions.
marcus evans had the privilege to hear from Houman B. Shadab. Below he shares with us his perspective on key issues facing the clearing and settlement process, including how the Dodd Frank Act will affect the regulatory landscape and how to prepare for the new requirements.
Who do you think will feel the biggest impact of the incoming regulations and why?
Houman B. Shadab: Dealer banks will probably feel the biggest impact of the new regulatory framework as they are one of the primary direct targets of the new regulations. This impact will not only be due to the new capital and margin requirements and general compliance burden, but also due to the sea change in moving from a bilateral, telephone-negotiated OTC derivatives market to one where transactions are increasingly intermediated electronically by clearinghouses and trading platforms. The great shift from a bilateral environment to an intermediated one will also provide new business opportunities for the institutions and firms that directly provide central clearing and trading services, and for third parties that help make the process more efficient and less risky, including brokers and providers of data and collateral management systems. Asset managers and other buy-side participants will also feel the impact of the new regulations in the form of developing the infrastructure required to trade in a centrally cleared environment.
How smoothly is the regulatory process running and are things running according to the anticipated timeline?
HS: It has been about two years since the Dodd Frank Act was passed and so far the regulatory process is running far behind its official schedule. In the area of derivatives rulemaking, regulators have missed about half of their deadlines for final rules. The regulatory process is moving slower than mandated due to the enormous volume of new rules required, the complexity of the rules, and the fact that many rulemakings must be coordinated among different regulatory bodies. Regulators are also moving at a measured pace in response to the large volume of input from industry and other interested parties.
Is change for the better and how will it benefit the C&S process?
HS: Overall, the operational and market structure changes to the C&S process that began prior to the financial crisis will make it more robust, efficient, and transparent. Changes mandated by or that result from the regulatory overhaul may also have the same effect. But the movement towards a cleared environment will also introduce new types of costs and risks to the C&S process. For example, elevating the importance of clearinghouses raises the stakes for regulators in properly overseeing the operations of a new class of “too big to fail” institutions. In this way, reducing counterparty risks may increase systemic ones. Another example of a new cost to the C&S process comes from less cross-margining across different positions. Collateral demands and operational costs may increase to the extent central clearing does not enable as much cross-margining as bilateral trading previously did.
To what extent do you believe extra-territoriality will be an issue?
HS: The extra-territorial reach of domestic laws in light of changing local rules and market practices will be an important issue for the foreseeable future. Derivatives transactions often take place across two or more jurisdictions and no two jurisdictions are developing the exact same regulations or requirements. National regulators are aware that their rules will lack any teeth if they can be avoided simply by being carried out by foreign subsidiaries or affiliates. Accordingly, Title VII of the Dodd-Frank Act and other national derivatives regimes will necessarily have an extra-territorial aspect that may need to be addressed as part of a firm’s routine compliance and operational practices.
Do you believe regulatory harmonization/ co-operation is realistic and how do you think the regulatory process could work towards this?
HS: Pure harmonization of regulatory requirements across jurisdictions is neither realistic nor desirable. A better and more feasible alternative to harmonization is substituted compliance (or “mutual recognition”), which entails a regulatory body exempting compliance with its own rules so long as an entity is complying with a foreign regime of comparable quality. Recently, the Commodity Futures Trading Commission released guidance on how to interpret the Dodd-Frank Act’s extra-territorial application. That guidance relies largely on the concept of substituted compliance in determining whether U.S. rules apply to non-U.S. swap dealers or non-U.S. branches and affiliates of U.S. swap dealers. Going forward, we should expect to see other regulatory bodies rely on substituted compliance as an alternative to harmonization.
Houman B. Shadab will be a speaker at the upcoming Collateral Management Conference, November 5-7, 2012 in New York, NY. For more information please contact Michele Westergaard, Senior Marketing Manager, Media & PR, marcus evans at 312-540-3000 ext. 6625 or Michelew@marcusevansch.com.
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