Dodd Frank: The Start of Many Cross-border Regulatory Requirements?

Jeroen van Doorsselaere, Wolters Kluwer Financial Services - 13 August 2013

It is not unusual for many regulations or laws to be required by different regulators, but sometimes the issue lies in the fact that some requirements are applicable to an organisation without being part of the country from where the requirement originates. It seems that these events are often out of sight for reporting departments outside the US.

The US’s Dodd Frank Act (for example, Title VII), which officially has an impact on three kinds of financial institution (FI), is a prime example. The companies belonging to the first category of the directive are those organisations located in the US; second is any institution that has executed a swap within the US, even where they are not US-based; third is any swap that was registered or cleared within the US. Dodd Frank, which requires a series of reports that need to be made available, is also applicable for most FIs with trade activities with the US.

This globalisation of regulations has impacted mostly on investment banks and trading desks within conglomerates but has extended even to organisations such as energy companies trading in commodities. This provides many questions which need to be carefully examined by any affected organisations, such as:

  • Are they prepared to do the necessary additional reporting?
  • Are their systems ready to accommodate the new complex reporting demands?
  • Are they aware they should look at disclosures in a more international way?
  •  How will they solve these requirements in a cost effective way?

Ultimately, these questions boil down to one; should an organisation opt for a ‘patch’ solution or should they take the time to invest in a scalable solution?

Title VII of the Dodd Frank Act creates problems for different institutions in the sense of the collection of data from different systems. However this issue was already in evidence when some of the Financial Accounting Standards Board (FASB) or International Accounting Standards Board (IASB) rules were implemented. The organisation has the choice between again hiring a battery of consultants for making the necessary data interfaces, or the creation of a data mart for Dodd Frank. The alternative is to go for a scalable solution which unifies the different data in ‘one single version of the truth’ and to make it available for any future additional disclosures. This is the choice that organisations face every time.

Short-term Fixes

The problem lies in the fact that the short term ‘patch’ is typically much cheaper and easier than the strategic solution. However, in the long run this option can create a convoluted junction of systems, potentially leading to a longer throughput time and less transparency. This is also the result of short -term budget cuts leading to long-term budget overruns which are structural.

Experts should take a step back and analyze from a distance to actually see the results of these ‘additional disclosures’ and how they lead to opposite objectives. Every new regulation claims when introduced to improve transparency and reporting for stakeholders of the organisation, yet instead more complex system architecture and endless manual updates and user interferences are creating the opposite effect. Is more information always for the better, or is less volume but higher quality and transparency the optimum level?

On top of the additional disclosures required, an increasing number will have to be available in real time. For swaps Dodd Frank requires that trades should be handled directly within accounting - so far as technology allows - providing oversight of the impact. The creation of market-to-market valuations in order to calculate unrealised and realised profit and loss (P&L) to immediately see the impact is important. How can a ‘patch solution’ be real time, or even near real time? A second reason for why a strategic and scalable solution should be the preferred option for these organisations is not only the reduction of costs in the long run but the benefit of being prepared for all regulations and demands to come.

Dodd Frank is just the beginning. Will other great economic powers such as the European Union (EU) and China also come up with their own cross border regulation or will they be internationally aligned? Other disclosures are becoming more severe and will demand more skills and time from the preparers. The move from information consuming pushed by the regulators to a situation in which those assets can be deployed for analytical and strategic decision will be allayed by choosing a strategic solution.

Whether it is Dodd Frank, International Financial Reporting Standards (IFRS) or Financial Accounting Standards (FAS) compliance is something which is inevitable, but opting for a strategic or an ad-hoc solution will determine how well organisations can adapt to new compliance requirements.                                                                                                                                        

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