dodd - Blog - Global Risk Community2024-03-29T10:56:17Zhttps://globalriskcommunity.com/profiles/blogs/feed/tag/doddTime to revisit rushed Dodd Frank compliance?https://globalriskcommunity.com/profiles/blogs/time-to-revisit-rushed-dodd-frank-compliance2014-10-03T10:26:51.000Z2014-10-03T10:26:51.000ZNeilVernonhttps://globalriskcommunity.com/members/NeilVernon<div><p>Implementation deadlines have been and gone but banks are still living in Dodd-Frank’s shadow. One of the issues is that best practice hasn’t yet been agreed: the regulators still need to clarify standards. This is leaving many fumbling around in the dark for the right route to compliance.</p><p>While the regulators iron out the standards, several financial institutions have cobbled together ‘half-way house’ applications so they can tick the compliance box. Some have even resorted to Excel for a quick fix. But this can’t be a long term solution.</p><p>So how much of an issue is this lack of standardisation? Under Dodd-Frank, banks must put any discrepancies in a trade with a counterparty under the microscope. Some banks are taking a literal, granular approach, creating an exception for every attribute of a trade that doesn’t match. Others are saving energy by grouping batches of similar exceptions together. It’s not yet clear which approach regulators will favour. But from this example, it’s evident that some banks are generating more work for themselves than others. The result? Increased operational cost to cope with the additional volumes of exceptions.</p><p>While uncertainty over the standards is still rife, one thing is for sure: manual processes won’t cut it when the standards are finalised or another rule comes along. To ensure they are completely compliant – fast – banks must leave spreadsheets behind and turn to automated systems that are easily adaptable and can accommodate any changes in the rules. Else they risk being overshadowed by competitors who have already adopted this approach.</p></div>Climate-Changing Regulatory Standards Challenge Banking Industryhttps://globalriskcommunity.com/profiles/blogs/climate-changing-regulatory-standards-challenge-banking-industr-12013-08-16T21:25:07.000Z2013-08-16T21:25:07.000ZTyler Kelchhttps://globalriskcommunity.com/members/TylerKelch<div><p>Today’s banking industry must deal with an evolving regulatory landscape by developing new and innovative strategies for acquiring and optimizing capital. Banks must find a new way to raise capital, maintain a functional capital structure, and continue providing the products and services their customers demand while staying profitable. The new deadline for implementing the Basel III capital requirements makes capital management the most important issue for banks today.</p><p>Bogie Ozdemir, Vice President, Risk Models and Governance, Sun Life Financial recently spoke with the Global Financial Markets Intelligence (GFMI) about key topics to be discussed at the upcoming <a href="http://www.global-fmi.com/CASS2013_BO">GFMI 2nd Annual Capital Adequacy, Strategy And Stress Testing Conference</a>, September 30–October 2, 2013, in New York.</p><p><b>What are the key implications of Basel III for capital adequacy and capital optimization?</b></p><p><b>Bogie Ozdemir:</b> Basel III amounts to a climate change in the banking industry. It increased the capital requirements significantly — especially for certain businesses (most notably capital markets) and decreased the acceptable forms of capital. Capital has become a scarce resource under Basel III, putting significant downward pressure on ROE. In this new environment, Banks will need to change their business mixes, exit or shrink capital-heavy businesses, and adjust their operating models, while meeting income targets. During this course correction, their ROE and Income Targets will be challenged further as some rebalancing of operating models may compromise short-term income to improve ROE in future years. Subject to more onerous capital requirements under Basel III, banks will need to increase the efficiency of capital utilization and place greater emphasis on optimizing capital allocation and business mix across their operations.</p><p><b>How could banks integrate their regulatory and economic capital?</b></p><p><b>Bogie Ozdemir:</b> Regulatory capital is a fact of life and cannot be ignored. The economic view of capital also must not be ignored, as most recently seen in the J.P. Morgan case where attempt to reduce RWA consumption resulted in massive increase in economic risk and, ultimately, losses. On the insurance side, products such as variable annuities emphasize the importance of understanding economic risks that may not have been covered by regulatory capital requirements. The first order of business is to control the regulatory capital, which becomes the binding constraint for certain business. But regulatory capital and economic capital must be co-managed. I have noticed some banks using more simplistic — but not very robust — ways of managing the two, such a creating a composite metric that is a mix of economic and regulatory capital. Banks should establish a more robust optimization framework, define an objective function (such as maximizing ROE), and define explicit relationships between regulatory, economic (and its stressed version), and available capital. This framework should be a part of their capital and strategic planning process.</p><p><b>What are the best sources of funding in this scarce capital environment?</b></p><p><b>Bogie Ozdemir:</b> Contingent capital is becoming a viable source of funding undergoing concern. Junior Debt would be a source of capital under the “gone-concern” to protect deposit holders (and perhaps senior debt holders). By more carefully managing capital through ongoing and gone concern bases through an Economic Capital Framework, financial institutions can be more precise as to their required capital mix across common equity, senior debt, junior debt and hybrid instruments, and therefore minimize the average cost of capital.</p><p><b>How could you make sure stress testing results are integrated in capital strategy?</b></p><p><b>Bogie Ozdemir:</b> We know from the last crisis that EC can increase significantly under stress — particularly when taking into account stressed inter and intra risk correlations. In their ICAAP/ORSA exercises, FIs define an explicit risk appetite under stress (minimum acceptable rating and capital adequacy) and ensure that they remain consistent with that risk appetite under a series of forward-looking conditional stress scenarios. As part of the Use Test under ICAAP and ORSA, FIs should demonstrate how the results of their stress testing and capital projection exercises have been incorporated into business planning decisions. In particular, the results of stress testing are used directly to inform the appropriateness of an FI’s capital buffer above its internal targets and whether the integrity of its capital structure is sufficient in stressed conditions. Degrees of vulnerability to stress must also be considered as part of capital optimization strategies.</p><p><i>Bogie Ozdemir is Vice President of Sun Life Financial Group, responsible for Enterprise Economic Capital, Operational Risk, Model Vetting & Risk Analytics, Risk Policy, and Economic Scenario Generation groups. He was a Vice President of the BMO Financial Group responsible for Economic Capital, Stress Testing, and Basel Analytics and jointly responsible for ICAAP. Previously, he was a Vice President of Standard & Poor’s Risk Solutions group, where he was globally responsible for engineering new products and solutions, business development and management. He is the coauthor of a book titled “Basel II Implementation: A Guide to Developing and Validating a Compliant, Internal Risk Rating System.”</i></p><p>The <b>GFMI</b> <b>2<sup>nd</sup> Annual Capital Adequacy, Strategy and Stress Testing Conference</b> will take place in New York, September 30–October 2, 2013. For more information, visit the <a href="http://www.global-fmi.com/CASS2013_BO">event website</a>.</p><p>For more information, please contact Michele Westergaard, Senior Marketing Manager, Media & PR, GFMI at 312-894-6377 or <a href="mailto:Michele@global-fmi.com">Michele@global-fmi.com</a>.</p><p><b>About Global Financial Markets Intelligence</b></p><p><i>GFMI is a specialized provider of content-led conferences for the financial markets. Carefully researched with leading financial market experts, our focused quality events deliver key bottom-line value through targeted presentations, interactive discussions and high-level networking opportunities. </i></p></div>Analyzing Effective Asset Valuation and Hedging Strategies to Optimize Investmentshttps://globalriskcommunity.com/profiles/blogs/analyzing-effective-asset-valuation-and-hedging-strategies-to2013-08-16T21:15:00.000Z2013-08-16T21:15:00.000ZTyler Kelchhttps://globalriskcommunity.com/members/TylerKelch<div><p>The energy market is becoming increasingly competitive and volatile. The key to maintaining a competitive advantage is to develop effective hedging strategies and minimize risk exposure. With the new regulations introduced by the Dodd Frank Act, energy companies have seen a big change in their approach to hedging and they are on the look-out for establishing effective hedging strategies to value their assets and optimize their revenue.</p><p>Stephen Wemple, Vice President, Regulatory Affairs, Con Edison Competitive Shared Services recently spoke with Global Financial Markets Intelligence (GFMI) about key topics to be discussed at the upcoming GFMI <a href="http://www.global-fmi.com/IHPOE2013_SWempleIntvw">Intelligent Hedging and Portfolio Optimization for the Energy Markets</a>, October 24-25, 2013, in Houston. <i>All responses represent the view of Mr. Wemple and not necessarily those of Con Edison and its subsidiaries.</i></p><p><b>A major topic of focus right now is the impact of swaps to futures on hedging strategies brought on by Dodd Frank. Can you explain your thoughts on what kind of impact this move to futures will have on hedging? Do you think energy companies will switch to the so called “futurisation” in order to avoid being a swap dealer?</b></p><p><b>SW:</b> The trend from swaps to futures was highlighted by the conversion of all of the Intercontinental Exchange (“ICE”) products last year into futures. That decision takes significant pressure off larger energy producers and/or trading shops that may have otherwise been getting close to the $8 Billion de minimis threshold for potentially being classified as a Swap Dealer or the equivalent tests for Major Swap Participants.</p><p><b>With the increasing cost for hedging with OTC derivatives, do you think energy companies will reduce their hedging or will just hedge with futures instead? Is there still room for bilateral contracts?</b></p><p><b>SW:</b> The increased cost may reduce some speculative trading but should not impact hedging activity which is determined by each company’s risk tolerance. As for bilateral contracts, they have been under pressure even before implementation of Dodd Frank as credit concerns have increased the use of exchange brokers to clear transactions. However, there is a real cost to clearing transactions that can be avoided if parties are willing (and able) to transact bilaterally. As a result, we believe there will be a continuing level of bilateral contracts, albeit diminished from historical levels.</p><p><b><u>Living in the New Regulated Market</u></b><b>: What needs to happen for energy companies to better understand how to implement Dodd Frank into their procedures?</b></p><p><b>SW:</b> By now, I expect most companies have integrated reporting and record retention requirements into their internal procedures to ensure that the reporting party is clearly identified and each party understands their obligation as well as begun the process of obtaining board approval to use the end-user exemption.</p><p>One remaining challenge is the determination of what constitutes a hedge. Unfortunately, CFTC has not provided much, if any, guidance; leaving companies to develop their own criteria for determining if a transaction is hedging commercial risk and can be considered a hedge. </p><p><b><u>Impact on End Users</u></b><b>: How will Dodd Frank affect their counterparties and their credit risk? Do you think that the new rules imposed by Dodd Frank will effectively reduce speculations and increase transparency in the market?</b></p><p><b>SW:</b> From our perspective, the energy industry had already taken significant steps to address credit risk before the implementation of Dodd Frank such as clearing more transactions and providing credit support for bilateral contracts. </p><p>One potential impact of Dodd Frank is it may constrain the types of energy products offered to municipal and governmental entities due to the lower de minimis threshold for Special Entities and smaller counterparties that may not have the capability to clear swaps or are not Eligible Contract Participants and are therefore not eligible to enter into swaps.</p><p><b>As counterparties shut down their swap-trading desks and shift their focus on exchange-traded products, end users fear that liquidity in bilateral markets will dry up. Is this worry warranted?</b></p><p><b>SW:</b> The lack of bilateral liquidity and the increased use of exchange traded and cleared products does have an economic cost to market participants in the form of working capital to post initial margin and meet daily margin calls, but the trade-off is a reduction in the risk of the counterparty defaulting.</p><p><b>“The best option for energy traders is hedging physical assets.” Would you agree or disagree with this statement? Why?</b></p><p><b>SW:</b> Clearing products on an exchange is clearly the most risk-averse way to execute hedges but may not be the most cost-effective, especially for those market participants that are entitled to elect the end-user exemption and transact bilaterally.</p><p><i>Stephen Wemple is the Vice President of Regulatory Affairs at Con Edison’s Competitive Shared Services company. He represents Con Edison’s non-utility affiliates, Con Edison Development, Con Edison Energy and Con Edison Solutions in State and Federal regulatory proceedings and has been an active participant in the New York, New England and PJM wholesale markets. Mr. Wemple has worked for the Con Edison family of companies for 26 years with responsibilities ranging from resource planning for steam-electric generation, the design and implementation of energy efficiency programs, the development of retail access programs as well as marketing and business development for the wholesale and retail commodity businesses. Mr. Wemple received his Bachelor of Science and Master of Engineering degrees from Cornell University and has been a volunteer firefighter in New York since 1987.</i></p><p>The <b>GFMI Intelligent Hedging and Portfolio Optimization for the Energy Markets Conference</b> will take place in Houston, October 24-25, 2013. For more information, visit the <a href="http://www.global-fmi.com/IHPOE2013_SWempleIntvw">event website</a>.</p><p>For more information, please contact Tyler Kelch, Marketing Coordinator, Media & PR, GFMI at 312-894-6377 or <a href="mailto:Tylerke@global-fmi.com">Tylerke@global-fmi.com</a>.</p><p><b>About Global Financial Markets Intelligence</b></p><p><i>GFMI is a specialized provider of content-led conferences for the financial markets. Carefully researched with leading financial market experts, our focused quality events deliver key bottom-line value through targeted presentations, interactive discussions and high-level networking opportunities. </i></p></div>The Importance of Economic Capital in the New Regulatory Environmenthttps://globalriskcommunity.com/profiles/blogs/the-importance-of-economic-capital-in-the-new-regulatory2012-08-20T15:54:32.000Z2012-08-20T15:54:32.000ZMichele Westergaardhttps://globalriskcommunity.com/members/MicheleWestergaard<div><p>The Dodd-Frank Act and Basel III are going to change the way banks raise, allocate and manage capital. Banks need to prepare for these changes now and develop effective strategies for achieving capital optimization and sustainable return on equity. The <a href="http://www.mefinance.com/CAS_InterviewCL"><b>GFMI, a marcus evans, Capital Adequacy and Strategy Conference, September 12-14, 2012 in New York, NY</b></a>, will help banks to understand what the legislation means for capital adequacy, as well as what they need to do to achieve the optimum level of capital to ensure continuous profitability.</p><p>Not only do US banks have to understand the Basel compliance rules, but they also need to understand how this relates to the Dodd Frank compliance act and how these two regulations work together to build a capital strategy.</p><p>Clifton Loo answered a series of questions written by GFMI before the forthcoming <b>Capital Adequacy and Strategy Conference</b>. <i>All</i> <i>responses represent the view of Mr. Loo and not necessarily those of SunTrust Bank.</i></p><p><b>What do you think of the latest additions/clarifications to the Basel III requirements?</b></p><p>Overall the requirements are consistent with both the CCAR process and also the Dodd Frank Act. Although we agree in concept with the majority of the information, some of the requirements seem to have erred on the overly cautious side causing banks to be at conflict with their basic process of lending. Other items appear to need more thought like the change in the reps and warranties. </p><p><b>How do the regulations really affect capital adequacy on a daily basis?</b></p><p>Risk weights have gone up and there are less capital instruments that can be used to meet our capital requirements and ratios. In addition, depending on how you interpret the rules, some of the buffers may not actually be buffers because of the Prompt Corrective Action that is attached to failing to meet the requirements.</p><p><b>How important is economic capital (EC) at the moment?</b></p><p>EC is still important for risk adjusted pricing, portfolio mix management and risk tolerance/limit setting. However, EC is not important from a capital adequacy or regulatory perspective. Regulators have almost no focus on EC, but there are rumours this will change.</p><p><b>What are the ways (if any) to minimize regulatory capital?</b></p><p>This is a hard question because to minimize regulatory capital, you have to change your product mix as regulatory capital calculations are based on products. This change in product mix may make the bank less profitable or unprofitable. Banks may need to rethink how to measure profitable return from a regulatory perspective.</p><p><b>What do you feel attendees will gain from attending this conference?</b></p><p>I think the regulatory environment has become restrictive and this conference is a forum to discuss how businesses are reacting to the new regulatory environment to keep their businesses profitable. Also, the conference may be a good forum to rethink how EC and regulatory capital are used in the risk adjusted decision making process.</p><p><i>Clifton Loo, PhD currently serves as the Head of Economic Capital at SunTrust Banks. In this capacity, he leads the effort to calculate economic capital along with assisting in the bank-wide calculation of risk adjusted return on capital. In addition, his team builds the econometric models for the CCAR process. In previous positions, he has worked as Portfolio Risk Manager and Operational Risk Manger in SunTrust Robinson Humphrey and also a Model Validation Manager at SunTrust.</i></p><p>For more information please contact Michele Westergaard, Senior Marketing Manager, Media & PR, GFMI at 312-540-3000 ext. 6625 or <a href="mailto:Michelew@marcusevansch.com">Michelew@marcusevansch.com</a>.</p></div>Over Regulation is going to be our downfallhttps://globalriskcommunity.com/profiles/blogs/over-regulation-is-going-to-be-our-downfall2011-11-21T17:30:00.000Z2011-11-21T17:30:00.000ZMartin Davieshttps://globalriskcommunity.com/members/MartinDavies92<div><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">There are a huge array of regulatory mandates planned for the financial sector in the next three to five years and the potential unwanted outcomes are probably going to be diverse and multitudinous.</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">Ten combined regulatory afflictions would more than likely include this lot:</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">[<span style="color:#3366ff;"><b>1</b></span>] Closing the proprietary trading desk – Volcker</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">[<span style="color:#3366ff;"><b>2</b></span>] A CVA charge for the trading book – Basel III</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">[<span style="color:#3366ff;"><b>3</b></span>] The countercyclical buffer – Basel III</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">[<span style="color:#3366ff;"><b>4</b></span>] Restrictions on the types of capital that can be held – Basel III</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">[<span style="color:#3366ff;"><b>5</b></span>] Axing of Tier 3 capital and hybrid capital – Basel III</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">[<span style="color:#3366ff;"><b>6</b></span>] Credit retention for securitised books – Dodd Frank</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">[<span style="color:#3366ff;"><b>7</b></span>] A move to central clearing and away from OTC trading – Numerous regulation</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">[<span style="color:#3366ff;"><b>8</b></span>] Changes to amortised cost for securities especially those not held to maturity – IFRS 9</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">[<span style="color:#3366ff;"><b>9</b></span>] New liquidity measurements and debt rollovers – Basel III</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">[<span style="color:#3366ff;"><b>10</b></span>] Monetising your own default DVA charge – Basel III</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2"> </span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">Let's ask ourselves, is the cure for banking disorder as problematic as the cause?</span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2"> </span></p><p><span style="font-family:arial, helvetica, sans-serif;" class="font-size-2">More here <span style="color:#0000ff;"><a target="_blank" href="http://quantogate.blogspot.com/2011/11/over-regulation-affliction.html">QuantoGate</a></span></span></p></div>DFA Reform: With 30% of rules in place will regulators be ready to prevent another financial crisishttps://globalriskcommunity.com/profiles/blogs/dfa-reform-with-30-of-rules-in2011-05-19T00:30:00.000Z2011-05-19T00:30:00.000ZMarijana Curguzhttps://globalriskcommunity.com/members/MarijanaCurguz<div><p><span style="line-height:115%;font-family:'Times New Roman', serif;font-size:10pt;">With House Committee passing a slew of rules on May 4, 2011 to postpone the implementation of derivatives section of the DFA by 18 months,</span> <span style="line-height:115%;font-family:'Times New Roman', serif;font-size:10pt;">Seila Bair’s decision to leave the FDIC on July 8,</span> <span style="line-height:115%;font-family:'Times New Roman', serif;font-size:10pt;">Geithner’s warning of a financial crisis if the legal debt limit is not raised, many are wondering if the U.S. economy is heading back into recession and will regulators be ready to prevent it.</span></p><p> </p><p class="MsoNormal" style="margin:0in 0in 10pt;"><span style="line-height:115%;font-family:'Times New Roman', serif;font-size:10pt;">These and other concerns were the main focus of the Regulatory Risk conference held in New York on May 9-10, 2011. <span> </span>The organizer, Marcus Evans, brought together leading industry Experts and a keynote speaker Carlo V. di Florio, Head of SEC Office of Compliance Inspections and Examination, <span> </span>to evaluate critical Regulatory Reforms: the Dodd-Frank Act, Basel III, housing finance reforms and KYC/CIP that are drastically altering the landscape of the financial world as we know it.</span></p><p> </p><p class="MsoNormal" style="margin:0in 0in 10pt;"><span style="line-height:115%;font-family:'Times New Roman', serif;font-size:10pt;">Florio underlined SEC need for a big budget boost to keep up with the fast-growing markets and carry out new duties they were tasked by the DFA. SEC was handed lion’s share of work to implement DFA that requires it to write nearly 100 new rules for Wall Street by summer, manage systemic risk, oversee the $600 trillion derivatives market, regulate the unregulated (PE, HF, Credit Rating Agencies, ABS) and catch the next Bernard Madoff, and secure greater transparency and liquidity.</span></p><p><span style="line-height:115%;font-family:'Times New Roman', serif;font-size:10pt;"> </span></p><p><span style="line-height:115%;font-family:'Times New Roman', serif;font-size:10pt;">Regulators confirmed they asked the Congress to extend the deadline for some portions of their rulemaking as only 30% of the regulations have been enacted while 62% of 387 rules have not been proposed yet. As of April 2011, none of the deadlines of 30 DFA rule makings were met. On May 4, 2011, House Committee approved a bill to delay by 18 months or until December 31, 2012 the derivatives section of DFA. It kept the July 21, deadline for reporting of swap trades and for regulators to define who is covered by the law. The largest 25 bank holding companies currently have $277 trillion notional amount of swaps. <span> </span></span></p><p> </p><p class="MsoNormal" style="margin:0in 0in 10pt;"><span style="line-height:115%;font-family:'Times New Roman', serif;font-size:10pt;">Florio said SEC is finalizing the rules on the new risk-based national exam program, consolidated audit trail and large trader reporting, that will help it better track trading across the fragmented U.S. equity markets. Some of the key risks the Exam is focusing on, broken down by participants, are: Investment Managers (valuation, portfolio management, performance), Broker Dealers (product innovation, abusive sales practices, lack of technology/system breaks), Credit Rating Agencies (conflict of interests, inadequate processes, people).</span></p><p> </p><p class="MsoNormal" style="margin:0in 0in 10pt;"><span style="line-height:115%;font-family:'Times New Roman', serif;font-size:10pt;">The panel of industry experts including Mark Gunton, CRO, HSBC, Scott Polakoff, Principal, Booz Allen, to name a few, shared their experiences and view on how to navigate the regulatory landscape to create an effective compliance plan, determine what compliance areas are most important for growth and managing regulatory compliance risk, evaluate the people, processes and technology necessary to facilitate compliance with new regulations, optimize compliance and risk management practices by discussing key issues: new capital and liquidity requirements, enhance transparency across the business.</span></p><p> </p><p class="MsoNormal" style="margin:0in 0in 10pt;"><span style="line-height:115%;font-family:'Times New Roman', serif;font-size:10pt;">The conference ended on a positive note, with participants believing the financial industry is heading for further consolidation though the worst might be over as some indicators purport it: Loss projections for FI are budgeted at<span> </span> $4.5 <span> </span>Bn down from $23 bn, a year ago, deposit insurance is profitable again, Banks downgrades declined, Banks failure cost decreased to $92bn from $170bn y-o-y, there is more transparency in the markets, Whistleblowers regulation is in place, trading and markets, in particular swap deals have improved significantly.</span></p><p style="margin-top:0px;margin-right:0px;margin-bottom:.4em;margin-left:0px;line-height:1.5em;font-size:1em;padding:0px;"></p></div>