This paper covers the context of the Dodd-Frank Act, proposed changes and its impact on the financial services industry from a business and IT perspective.

1. White Paper
Dodd-Frank Act: Impact on Business and IT
- Vibhash Prakash Awasthi, Hemant Shashikant Dandegaonkar, Abhishek Prasad Mokal
Abstract
The Dodd-Frank Act (DFA), which was first proposed in fall of 2009, is expected to bring a paradigm shift in the state of
the regulatory environment of financial institutions. It will require transforming current IT systems which are supporting
regulatory compliance into more reliable compliance tracking systems and in-turn adding more value to the business.
While the act will complete two years in July 2012, it is still in an evolving stage and how it ultimately pans out is something
which remains to be seen. This paper will cover DFA’s context, proposed changes and impact on the financial services
industry from a business and IT perspective.
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2. Lack of regulatory oversight, neglected visible warnings, poorly understood toxic
instruments, size of financial institutions and their interconnectedness were some
of the reasons for the financial catastrophe in 2007-08. With the US being the
biggest source as well as victim of this crisis, the need to bring strong changes in
Introduction the US regulatory system was quite evident. The Dodd–Frank Wall Street Reform
and Consumer Protection Act (DFA) aims to bring in sweeping changes in the US
regulatory system.
While DFA aims to bring in structural changes to a lot of areas, it will have a strong
impact on IT systems as well. We believe that data management, regulatory
reporting and trading platform changes are likely to be the major areas where IT
systems will be impacted. This paper discusses the impact on some of the IT systems
in the financial services industry.
DFA’s major objectives are to prevent a repeat of events like the credit crisis, remove
the myth of “too big to fail” and avoid bail-outs from taxpayers money. Key highlights
of DFA’s proposal which aim to transform the regulatory structure are:
• Protect American consumers from abusive financial services practices.
• End the “too big to fail” bail-out concept to ensure that taxpayers don’t bear
the brunt of the failure of large financial institutions.
• Create advance warning systems so that the entire financial system is well
prepared to deal with future crisis.
• Bring more transparency in derivatives and exotic instrument markets
ensuring that these instruments, which was one of the major reasons for the
credit crisis, don’t create havoc again.
• Increase accountability of credit rating agencies as these ratings play a major
role in investment decisions for debt instruments.
• Provide shareholders a say in executive remuneration so that top executives’
decision making is aligned with the long term interest of the financial
institution (FI) rather than making personal gains.
DFA’s main objective is to protect the American financial system and its various
stakeholders. The act will need FIs to develop and adopt a new organizational
culture which has its foundation laid on the principles of customer and investor
protection. Certain proposed changes under DFA, like pricing of different products
or value proposition to the customers, will impact the financial performance of
FIs. Hence, FIs will need to transform their business strategy so that the impact of
proposed changes on their financial performance is minimal. In the DFA regime, FIs
will also need to improve their risk and compliance capabilities such as developing
a comprehensive risk reporting framework including real-time reporting or
developing a robust stress testing mechanism across different scenarios. With
the act cutting out certain revenue streams for FIs and putting an additional cost
burden of complying with new regulatory requirements, FIs will need to be more
efficient in their cost management. FIs will need to be quick in their response to the
changing regime. They will require setting up a regulatory response team managing
coordination amongst the firm’s different businesses and help in implementing the
regulatory compliance program.
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3. Major Sections of DFA
DFA has been categorized into sixteen different acts. All these titles, collectively, aim to bring more clarity in the role and responsibilities of
the regulators, do away with the ambiguity in existing regulations and empower the regulators. In order to do so, the act mandates many
changes to the activities of financial institutions and banks. The figure below showcases the major areas that will be impacted by the act.
Clarifying Federal Regulator Powers Mandating Changes to Financial Firm Capital Markets Related
and Responsibilities Activities Provisions
Created the Financial Stability Prohibit Proprietery Trading
Creation of Clearing Houses for Swaps
Oversight Council (Volcker Rule)
Altered Federal Banking Regulation
Stringent Norms for Securitization Reform of Credit Rating Agencies
and Supervision
Curtailed Federal Reserve’s Emergency Registration of Investment Advisor to Consumer Protection Provisions are
Credit Lending Abilities be More Stringent Mandated
Created the Orderly Liquidation Provide Shareholders a Say in
Tightened Securitization Standards
Authority Executive Compensation
DFA’s Impact on Business and IT
DFA aims to bring about a complete overhaul in the existing financial system and impacts different Lines of Business in the financial services
industry. The following table highlights the impact of DFA in certain lines of business and the impact on the corresponding IT systems.
Business Lines (Impacting Acts) Business Impact IT Impact
Commercial / Consumer Lending • Requirement for stricter origination and • Existing systems will have to adapt to new rules and
(Title XIV – Mortgage Reform and underwriting leading to the need for better regulations especially regarding mortgage lending.
Anti-Predatory Lending Act1 documentation. • Latest regulations will put more focus on stress
Title VI - Improvements to • Increased focus on standardizing data collection testing.
regulation of bank and savings for underwriting. • Higher requirements for documentation with more
Association holding companies • Restriction on mortgage originators to lend only stringent loan tracking and borrower performance
and depository institutions2, to those borrowers who are likely to repay their tracking.
Volcker’s Rule) loans. • Increased focus on internal quality checks leading to
• Stricter residential mortgage organization increased testing requirements for existing systems.
standards which must be met while lending. • Greater regulatory reporting with regards to lending
• Capital restrictions on investments will impact activities, loan monitoring and investments.
proprietary trading which will in-turn surely have
revenue impacts on banks.
Investment Banking • Volcker’s Rule places restrictions on proprietary • Factoring / implementing rules within existing
(Title VI - Improvements to trading and certain M&A activities. systems to prevent prohibited trades.
regulation of bank and savings • Stricter restrictions on securitization business will • Increased focus on testing to ensure prohibited
Association holding companies result in lower transaction volumes of securitized transactions are avoided.
and depository institutions, instruments. • Greater amount of regulatory reporting.
Volcker’s Rule)
Wealth Management and • Increased reporting requirements of investment • Implement stricter pre-trade compliance checks,
Investment Advisory advisors. more system enforced restrictions and post-trade
(Title IV – Regulation of Advisers • Limit the ability of financial / wealth advisors to compliance reporting.
to Hedge Funds and Others3 exclude information while reporting to various • Incorporate new regulations into processes and
Title IX - Investor Protections and federal government agencies. business rules of online transaction processing
Improvements to the Regulation • A code of conduct for investment advisors and systems.
of Securities4) broker-dealers while providing personalized • Increased regulatory reporting requirements on
investment advice to retail investors. financial advisors for disclosing details such as assets
• Investment advisors and broker–dealers to Provide under management (AUM), leverage including
equal treatment to retail investors. off-balance sheet items, counterparty exposure,
valuation, trading policies and side arrangements.
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4. Business Lines (Impacting Acts) Business Impact IT Impact
Hedge Funds and Private Equity • Hedge funds and PE funds will need to register • With the registration of hedge funds and PE funds
(PE) Funds themselves with the Securities and Exchange becoming mandatory, these institutions will need to
(Title IV- Regulation of Advisers to Commission (SEC). set up their own compliance offices and systems.
Hedge Funds and Others) • Banks can’t provide more than 3% of the fund’s • Increased requirement for record keeping
capital or invest more than 3% of their Tier 1 and reporting of assets under management,
capital which will lead to an impact on fund counterparty credit risk exposure, valuation
raising for hedge funds and PEs. methodologies and practices, types of assets held
• DFA puts a restriction on the ability of banks and trading practices.
to bail out a fund in which they are invested.
Thus, banks will have to be more prudent while
investing which will lead to relatively riskier funds
being forced out of the market.
Securities Trading • SEC and Commodity Futures Trading Commission • Introduction of a new trading platform - SWAP
(Title VII – Wall Street (CFTC) to regulate over-the-counter (OTC) Execution Facility (SEF).
Transparency and derivatives to prevent excessive risk-taking. • Other participant trading platforms will need to
Accountability5) • Central clearing for OTC derivatives and exchange adapt to central clearing and exchanged trading.
trading for swaps will become mandatory (except • Real-time and pre-decided period-based reporting
for a few deviations as provided in the act). for public, regulators and market supervision while
• DFA proposes a role for both regulators and following the guidelines for dada dissemination.
clearing houses to determine which transactions
should be cleared.
• Need for data collection and publication through
clearing houses or Swap Data Repositories (SDRs)
to improve market transparency, monitoring and
response from a regulatory perspective.
• DFA empowers regulators with the authority to
impose capital and margin requirements on Swap
Dealers (SDs) and Major Swap Participants (MSPs)
instead of the users.
1 Title XIV—Mortgage Reform and Anti-Predatory Lending Act, Dodd-Frank Wall Street Reform and Consumer Protection Act – June 2010, Page 773,
2 Title VI—Improvements To Regulation Of Bank And Savings Association Holding Companies And Depository Institutions, Dodd-Frank Wall Street Reform and Consumer Protection Act
– June 2010, Page 226
3 Title IV—Regulation of Advisers to Hedge Funds and Others, Dodd-Frank Wall Street Reform and Consumer Protection Act – June 2010, Page 199
4 Title IX—Investor Protections and Improvements to the Regulation of Securities, Dodd-Frank Wall Street Reform and Consumer Protection Act – June 2010, Page 870
5 Title VII—Wall Street Transparency and Accountability, Dodd-Frank Wall Street Reform and Consumer Protection Act – June 2010, Page 271
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5. DFA’s Progress Report
As of April 2012, the count of DFA’s total required rulemakings stood at 398. However, DFA’s progress has been sluggish with the rulemaking
activities running way behind schedule. 221 of DFA’s rulemaking requirements should have been finalized but only 73 (33%) of the rulemaking
requirements could reach the finalization stage while 148 (67%) of the rulemaking requirements missed this deadline.
Further, only 108 (27%) of the total rulemaking requirements have been finalized whereas 144 (36.2%) rulemaking requirements have not
even been proposed. The figure below displays DFA’s progress.
DFA Rulemaking Progress by the End of April 2012
30.90
%
30.90 Missed Deadlines, Proposed
%
31.91
% Missed Deadlines, Not Proposed
31.91
%
Finalized
4.77%
4.77% Future Deadlines, Proposed
5.28% Future Deadlines, Not Proposed
27.14 5.28%
%
27.14
%
What it means for IT Outsourcing
More IT investments DFA proposes stricter norms for lines of business spread across the financial services industry. This
across different lines of will not only require more investment in modifying existing IT systems but also building new IT
business systems and integrating them with existing platforms. In order to comply with new regulations,
financial institutions will need to increase investments towards IT.
Efficient cost
With DFA affecting the revenues across different streams (e.g. proprietary trading, OTC derivatives,
management may
changes in securitization) and rising costs (of risk management, compliance, reporting, switching to
result in greater
new platforms), the pressure on cost savings and efficiency will increase. This will push securities firms
outsourcing
to rely more on business process outsourcing (BPO) and information technology outsourcing (ITO).
DFA will also have an impact on the firms’ attitude towards IT services. It will influence the way
Changes in service concepts such as application service provider (ASP)-based delivery, software-as-a-service (SaaS)
delivery processes and cloud computing are viewed. During the last few years, there has been a clear trend in the
industry towards thin-client computing and accessing software through a web-based interface.
DFA will push this trend even further if the firms want to meet three main demands: cost reduction,
flexibility and real-time reporting.
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6. 1. A closer look: The Dodd–Frank Wall Street Reform and Consumer
References
Protection Act, Impact on Information Technology and Data, PwC,
October 2010
2. A closer look: The Dodd–Frank Wall Street Reform and Consumer
Protection Act, Impact on SWAP Data Reporting, PwC, October 2010
3. The Implications of Landmark US Reg. Reform Act, The Dodd–Frank Wall
Street Reform and Consumer Protection Act, Deutsche Bank, July 2010
4. The Dodd-Frank Wall Street reform and consumer protection act, or
Dodd-frank act, represents the most comprehensive financial regulatory
reform measures taken since the great depression, Morrison & Foerster
5. Summary: Restoring American Financial Stability, Senate Committee
on Banking, Housing, and Urban Affairs, Chairman Chris Dodd (D-CT)
6. Technology Implications and Costs of Dodd-Frank on Financial Markets,
TABB Group, March 2011
7. REGULATORY REFORM SUMMIT 2011 DODD-FRANK IMPACT ANALYSIS,
Barclays Capital, July 2011
8. US Regulatory Reform in Securities and Investments: The Dodd-Frank
Act and Its Implications, November 2010, Tower Group
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7. About the Authors
Vibhash Prakash Awasthi
Vibhash is a Lead Risk Consultant within the Risk and Compliance practice of FSI [Financial Services and Insurance]. He has rich experience
in Credit Ratings, Investment Banking and Basel II implementation. Vibhash earned his Post Graduate Diploma in Management from Indian
Institute of Management, Calcutta (IIM-C). He can be reached at vibhash_awasthi@infosys.com.
Hemant Shashikant Dandegaonkar
Hemant SD is an Principal Consultant within the Risk and Compliance practice of FSI [Financial Services and Insurance] responsible for
development of the practice, research and PoV creation, supporting proposals, and other practice PMO activities. He has worked in the banking
domain extensively in the areas like Basel-II, euro compliance and Y2K compliance. He is co-inventor for a patent on Program Maintainability
Index of Software applications in JAVA and COBOL. He can be contacted at hemant_dandegaonkar@infosys.com.
Abhishek Prasad Mokal
Abhishek Prasad Mokal is an Associate Consultant within the Risk and Compliance Practice of FSI [Financial Services and Insurance]. He is
finance major with CFA, Level 1 and has worked in the Retail Banking domain in the areas of Account Management and Mortgages. He can be
contacted at abhishek_mokal@infosys.com.
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