Not until one of this year’s US presidential candidates reaches the necessary 270 votes in the electoral college, will Wall Street, and the rest of the world, know the probable fate of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Throughout one of the longest and most contentious US presidential campaigns on record, Republican presidential candidate and former Massachusetts governor Mitt Romney pledged to repeal the landmark financial reform bill along with other major legislation like The Affordable Healthcare Act, better known as Obamacare.
With all the major opinion polls results citing a neck-and-neck race, the only certainty is that it will be a close one, according to Nicholas Colas, chief market strategist with financial technology firm and agency brokerage ConvergEx. “Only the most partisan of observers seem to feel differently,” he says.
If President Obama manages to be re-elected while the Democrats maintain their majority in the US Senate and Republicans keep majority in the US House of Representatives, the chance of the regulatory status quo is likely, according to Paul Rowady, a senior analyst with industry research firm TABB Group.
However if Romney wins and the Republicans maintain control of half the legislative branch, they may find that the regulatory train has left the station and it is too late to call back, he adds.
Since Dodd-Frank became law in July 2010, US financial regulators have finalised approximately a third of act’s required 398 rules, proposed another third of the rules that need to be finalised and have yet to propose the remaining third as of the end of October, according to the latest Dodd-Frank Progress Report compiled by legal firm Davis Polk.
“The industry is spending considerable resources to prepare for the new rules and adjusting its behaviour, systems and infrastructures,” says Rowady. “You would upset as many people by rolling Dodd-Frank back as you would please going forward.”
Securities Industry and Financial Markets Association (SIFMA) president and CEO Tim Ryan expressed similar thoughts during the industry organisation’s annual meeting on October 23. “We have been upfront in objecting to provisions that we believe are, at best, extraneous and unrelated to the financial crisis, such as the Volcker Rule,” he says. “But, we have never supported a complete repeal of Dodd-Frank, and do not support repeal now.”
Even if the next administration could repeal Dodd-Frank, it could not return the US markets to their pre-Dodd-Frank structure according to Rowady.“This is a global market that is undergoing a global transformation of which Dodd-Frank is just one piece,” he explains.
Returning the markets to such a state would eliminate or neuter other major market reforms taking place outside the US like the EU’s Markets in Financial Instruments Directive (MiFID) and European market infrastructure regulation (EMIR) as well as the global Basel III standard.
Both Dodd-Frank and Emir and in part responses to demands by the Group of 20 for reduced systemic risk in the OTC derivatives markets by end-2012, a deadline that Mark Carney, head of the Financial Stability Board, yesterday admitted was beyond regulators at a G-20 summit in Mexico.
Reform, not abandon
Although the Dodd-Frank is likely not to disappear with the swearing in of the 113th Congress in January 2013, many in the industry want to fix what they perceive as the act’s structural weaknesses.
The current model contains unrealistic deadlines that encourage flawed rule making, according to SIFMA’s Ryan. “Decisions that need to be made in a logical order are being made simultaneously or in the wrong order,” he observed recently.
As of the end of October, the US Commodity Futures Trading Commission (CFTC) finalised 35 rules for Title VII of Dodd-Frank regarding the OTC swaps market, while it missed deadlines for four proposed rules and four deadlines for another four rule, which still need to be proposed.
The US Securities and Exchange Commission (SEC) fared worse, finalising 10 rules while missing deadlines for 17 proposed rules and deadlines for two rules waiting to be proposed.
The existing rules cover many of the important issues, Ryan has acknowledged, but a number of provisions dealing with non-bank systemically important financial institutions, orderly liquidations and the extra-territorial nature of major Dodd-Frank rules remain unresolved. His verdict? “The model currently is not working.”
One suggestion put forward by SIFMA to address the shortcoming is to have the Department of Treasury’s Financial Stability Oversight Council, which is mandated to identify risks and respond to emerging threats to financial stability, step up and provide comprehensive coordination of the remaining Dodd-Frank rule making.
“The FSOC must agree that radical intervention is necessary and establish priorities reflecting the overall objective of Dodd-Frank: sharply reducing systemic risk so that 2008 can never happen again and investors and savers can operate without fear of a breakdown in our markets,” said Ryan.
Before market participants worry about how the next administration will handle financial regulation, ConvergEx’s Colas wonders how the current administration on Congress will address the 2011 Budget Control Act’s looming sequestration, or ‘financial cliff’.
“Numerous studies of the impact total 2-4 points of growth in gross domestic product should the entire cliff come into law,” says Colas. “Since that measure of economic growth is only currently running 2% or so, failing to address the cliff all but assures a recession in early 2013.”
How likely is it for Congress and the President to go over the cliff?
Colas turns to the ‘Five Stages of Grief’, developed by psychiatrist Elizabeth Kubler-Ross, to estimate how the party that loses the election may act during the lame-duck session.
“The good news is ‘acceptance’ is the final step – the person (or party) that suffers a loss almost always learns to cope with it over time,” he says. “The bad news is that there are four antecedent emotions, which are denial, anger, bargaining and depression – in that order. The first two steps seem especially ill-suited for a quick political compromise on the fiscal cliff.”