Three years after passage Dodd-Frank is still generating controversy as evidenced by an article in this morning’s New York Times. The current contentiousness centers on the desire of the Commodity Futures Trading Commission (CFTC) to regulate certain overseas derivative activities of American-based banks, foreign institutions and hedge funds. According to the Times the regulations would require these entities to: “turn over information on foreign trades if they involve United States customers, or are guaranteed by a financial institution with American ties…” The target firms see these regulations as overly burdensome and unnecessary while Gary Gensler, the chairman of the CFTC sees them as important to a coherent scheme to protect investors. The article points out the timeframe for implementation is as soon as mid-July. Regardless how one feels about the merits of the case for or against the new rules, there is no arguing that compliance officers, risk managers and their technology colleagues and partners who have to make the changes necessitated by the regulators actions are under pressure to get things done on time.
Some firms are in a better position than others to effect these changes but in general the complexity of technology platforms at most large financial institutions presents many challenges to those looking to quickly comply with new regulatory initiatives. Given the environment we are in where there is a lack of consensus, to put it perhaps too mildly, over the scope and level of appropriate government involvement in the day-to-day business of financial services, it is reasonable to assume the regulatory environment will remain unsettled. That being the case, a good strategy for dealing with this situation might be to build more flexibility into systems that are highly sensitive to regulatory change. Yeah right, easy to say. No doubt it brings to mind one of the several expressions heard among software developers to cover similar suggestions. The one that comes to me is: you can’t change the tires on a bus while it is barreling down the highway. When are you going to have the luxury of building in the flexibility? But it’s not hopeless and there are tools out there that can be part of the solution.
Rules engines or business rules management systems are one such tool. Lombard Risk, IBM and others offer solutions aimed specifically at Dodd Frank. Another option that I am familiar with is Brown Brothers Harriman’s Infomediary product which, while not currently directed specifically at regulatory changes, nonetheless provides a certain level of flexibility regarding the trajectory of transactions flowing from investment managers to their custodians, for example. But the key point is that a one-off approach to this set of regulations may not be the most beneficial way to expend scarce technology resources. At some level the bus analogy has to be resisted to make the type of changes that will be most effective in the long run. A migration path that gets at least part of a rules-based, flexible solution in place while scrambling to meet the latest Dodd Frank directives needs to be part of the plan.