• Dodd-Frank Financial Regulatory Reform Bill

    After the 2008 subprime crisis and near-collapse of the U.S. economy due to improper use of complex derivatives and subprime loans in the housing market, US Congress has passed the Dodd-Frank Financial Regulatory Reform Bill on 30th June 2010 which was named after Senator Christopher J. Dodd and U.S. Representative Barney Frank. The Senate approved the Financial Reform Act on 15th July and President Barack Obama signed it into law on 21st July 21 same year.

    Dodd-Frank Financial Regulatory Reform Bill is a set of legislations that increased government/regulatory oversight of trading in complex financial instruments such as OTC derivatives which were till then unnoticed. It restricts the types of proprietary trading activities for financial institutions with the aim of preventing collapse of major financial institutions.

    Many of the law’s provisions are aimed at large banks and other financial firms deemed to be systemically important. Key banking related provisions in the act include:

    • Oversight for systemic risk – The bill sets up regulators with trade repositories in order to monitor and manage systemic risks. Systemically important firms will be supervised by the Federal Reserve
    • Regulatory consolidation – The Office of Thrift Supervision (OTS) will be eliminated, and its powers were distributed among the Federal Reserve, Comptroller of the Currency (OCC), and the FDIC
    • Improvement of Regulations – Regulation on financial market was improved significantly through different rules and provisions
    • New rules for too-big-to-fail banks – For big banks which are too-big-to-fail, the new law provides a new legal framework outside of existing bankruptcy law for the FDIC to take over the banks, sell off its assets, and impose losses on shareholders and creditors.
    • Concentration limit – No bank of financial institutions’ consolidated liabilities can exceed 10% of the national total of such entity’s liabilities
    • Risk governance – Larger financial firms must have Board risk committees with at least one expert member with risk management experience at a large, complex bank or financial institutions
    • Investors Protections – Increased investors protections by adding more disclosures to the investors

    Objectives of Dodd-Frank Financial Regulatory Bill:  

    1. The law promotes a safer system – It addresses many of the regulatory shortcomings by providing the legal framework to deal with different gaps.
    2. The law promotes financial stability by identifying more risk and mitigating them in advance
    3. Regulates OTC derivatives – OTC derivatives which were traded only over the counter without any knowledge of Exchanges will be reported to the regulators so that the open positions of different banks and financial institutions can be tracked regularly
    4. It gives regulators more powers and mandates, which should reduce the risk of crisis occurring.
    5. Improves regulations and brought more transparency and accountability in US financial market

    Post Dodd-Frank bill, all G20 countries have set up different regulators including EMIR for Europe, MAS for Singapore, ASIC for Australia to regulate OTC derivatives trading.

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