The Dodd-Frank Wall Street Reform and Consumer Act will bring the most sweeping changes in compliance rules since the 1930s. It means new risk and reporting challenges for every energy, finance and manufacturing firm, as well as any firm that trades commodities and derivatives. Like the Sarbanes-Oxley Act, Dodd-Frank is a regulatory reaction to a severe market correction, but this time the change goes beyond compliance restrictions to a shift in how your daily business is conducted.
At the Premier Business Leadership Series in Orlando on Tuesday, a panel comprised of leaders from some of the affected industries gathered to discuss the implications of the act. Panelists included, Jim Allison, Risk Manager, ConocoPhillips; Matthew McGrory, Senior Counsel, Corporate and Regulatory Division, Wells Fargo & Company; Linda Chatman Thomsen, Partner, Davis Polk and Ian Jones, Senior Strategist for Commodity Risk at RiskAdvisory (moderator).
Unlike Sarbanes-Oxley, the Dodd-Frank act is likely to go beyond reporting to include analytics (depending upon specific implementation). Jones shared three ‘shocking’ facts about the Dodd-Frank act:
- Incentivizes whistle-blowing – is this a disincentive for employees to internally report?
- Margin requirements for swap trading requires companies to keep in reserve $100 millions of highly liquid assets.
- The position limits rules restricts trading on commodities – which may make it even more difficult for producers to hedge their positions on basic commodities
Thomsen said that she thinks that businesses need to make a start on implementing these new regulations now, whilst keeping an eye on the near-term horizon; those who implement early are likely to be in the best p0sition to give constructive feedback and propose alternatives. She said that this is especially true if you are going to be profoundly affected by the regulations. As we get closer to the deadlines, there are bound to be some last-minute provisions which will be harder for the stragglers to deal with than those who already have an ongoing dialogue with the regulators.
Allison shared three tips for how industrial companies that may have thought the act was only going to affect financial institutions should prepare:
- Ask yourself what is your status under the Act likely to be – if you don’t like the answer, think about changing and adapting your business to a more attractive alternative.
- If you are using derivatives for hedging, take a long, hard look at your hedging program.
- Dodd-Frank will transform many industries, so look for the opportunities this presents.
McGrory believes that Dodd-Frank will impact almost every aspect of doing business for a large financial services company like Wells Fargo. This in turn requires changes within the business to address such a large and all-encompassing act. In the case of Wells Fargo, it required a small, centralised full-time team to analyse the Act and detail where it affects the business for action. In addition to this, Wells Fargo is taking advantage of this period to give the kind of feedback Thomsen mentioned.
Addressing the complex issue of internal reporting and whistle-blowing, Thomsen warned the audience that the provisions in the act make it very attractive for staff members to blow the whistle and collect on a potentially huge bounty. Problematically, internal reporting – something all businesses should have – does not provide a complete safeguard from the actions of whistle-blowers.
Allison told us about the challenge that the need for real-time reporting against transactional data is going to be. This is a huge shift from the past practice of batch reporting. It is further compounded by the fact that many legacy systems for commodities trading are not actually single systems – they are a collection of multiple systems built over time. In this area, there is huge potential for companies like SAS to provide overlay reporting and analysis systems on top of the legacy architecture; likely to be much more attractive than trying to rip-out and replace the existing systems.
You don’t have to be an expert in risk (and I am not) to see that this Act is going to have a major impact on a range of industries; I wonder how many businesses are not aware that they fall within the purview of the Act and will be caught out. However, it also strikes me that, whilst much is onerous, a lot of the Act makes sense from a business point of view. I suspect this is going to be a topic for heated debate for some time yet. Do you think it is better to start implementing the regulations now as Thomsen suggests or wait to see what changes lie ahead?