Collateral Management in OTC Derivatives Market

Collateral management is at the center of over-the counter (OTC) derivatives regulatory changes. Many industry initiatives are being developed to improve collateral management and optimize the supply of collateral - collateral optimisation and transformation solutions, automation, evolution of CCP practices to allow cross margining and expand the range of eligible assets to a certain extent. Collateral are assets that are pledged or transferred as security on the value of a loan or more generally of a credit exposure in order to mitigate the risk that a counterparty will default on its payment obligation. Collateral decreases the credit exposure by the mark-to-market value of that collateral. Haircuts are used to adjust the value of collateral according to its quality.

Collateral, which has been chosen by regulators as the main risk mitigation tool for putting in place the G20 commitments, is used to secure many types of transactions:

• Funding by banks at central bank
• Funding by banks or broker dealers at banks, by fund managers at prime brokers
• Derivatives transactions: i.e. initial and variation margin posted for on-exchange and OTC derivatives deals, contribution to the CCP default fund
• Securities lending
• Securities transaction settlement.

International Swaps and Derivatives Authority (ISDA) estimated that collateral used in uncleared OTC derivatives transactions reached approximately $ 3.6 trillion in 2011 and has grown at a compound annual rate of 17% over the past 6 years. The most predominant forms of collateral used for derivatives transactions are cash and sovereign debt from the main developed countries (G7 countries). Resort to collateral and demand for high quality liquid assets are expected to grow significantly in the coming years with the implementation of new regulations following the financial crisis.

Collateral Management Challenges (Source: Deloitte)

Central clearing of standardized OTC derivatives transactions due would become mandatory by the end of 2012. This is expected to raise the needs of dealers and their clients for high quality collateral since CCPs often demand more collateral and of a higher quality for equivalent positions than bilateral arrangements. Basel III liquidity coverage ratio (LCR) requiring banks to hold enough liquid assets to get through a 30-day period of severe funding stress will further reduce the availability of safe assets.

The increasing awareness of counterparty risks following the Lehman bankruptcy and the downgrade of bank ratings are additional drivers to the usage of collateral, as well as the impact of the sovereign debt crisis on related banks e.g. Spanish and Italian banks having to pledge higher quality securities (such as covered bonds) to access funding. Reduced availability of collateral in a context of increasing demand should increase the cost of obtaining and using collateral and may potentially lead to a liquidity squeeze and systemic risks if demand cannot be satisfied. Many solutions detailed below have been developed in the industry to improve collateral management:

An impact assessment of existing and projected collateral management solutions could be conducted at market level, in order to evaluate their potential capacity to address as a whole the increased demand for collateral in the coming years, taking into account the main milestones of on-going regulatory reforms. This would allow a better evaluation and anticipation of the possible shortages of collateral over time and a calibration of required solutions. Additional solutions could be envisaged for cash and non-cash collateral in order to e.g. increase the pool of collateral which is at present provided mainly by traditional buy-side participants (for example by involving some cash rich corporate players in financing mechanisms) or enhance the safety of traditional financing vehicles such as repos for borrowers.

Collateral optimization services:

Collateral agents propose a range of services to optimize the handling of collateral. Specific infrastructures have also being developed by the main triparty collateral agents to allow collateral to flow more easily, leveraging the pool of collateral available in these infrastructures or handled by these players. Their objective is to consolidate collateral pools at market level, enable market participants to keep track of the assets deposited and help holders of collateral to channel securities.

Collateral transformation services

Collateral transformation involves clients swapping non-eligible collateral for eligible collateral (e.g. cash or higher quality securities) via the repo market which can then be posted with CCPs.

Evolution of CCP practices

CCP practices could evolve in order to optimize collateral requirements (i.e. reducing overall margin requirements for related products), but these evolutions will probably remain limited in order to preserve market integrity and investor safety. Cross-margining can be used in order to reduce overlaps in collateral between closely related products e.g. between OTC interest rate swaps and interest rate futures products or between cash and derivative fixed income. Expanding the range of eligible collateral e.g. accepting some high-quality corporate bonds as collateral for OTC swaps can be another option.

OTC Derivatives under Central Clearing

Recent regulatory efforts, especially in the U.S. and Europe, are aimed at reducing moral hazard so that the next financial crisis is not bailed out by tax payers. Central Clearing was proposed by G20 as the solution (for OTC trading) after the financial crisis and mandated all these derivatives should move to Central Clearing by end of 2012. Failing to comply with this may result in charge of significant amount of capital. What this means is that rather than these derivatives being traded as mere contracts between two parties, these should go through one single entity. The financial crisis following Lehman’s demise and AIG’s bailout has provided the impetus to move the lightly regulated over-the-counter (OTC) derivative contracts from bilateral clearing to central counterparties (CCPs).The motive behind this proposal was to increase transparency on positions, reduce counterparty risk and reduce operational risk. This intends to reduce the exposure to default of each party. Per the OTC derivatives reform, standardized derivatives (~60% of the current OTC market) need to be electronically executed (SEFs), centrally cleared and publicly reported. Under the present regulatory overhaul, the OTC derivative market could become more fragmented. Furthermore, another taxpayer bailout cannot be ruled out. A key incentive for moving OTC derivatives to CCPs is higher multilateral netting, i.e., offsetting exposures across all OTC products on systemically important financial institutions’ (SIFIs) books. 

Of course, all this works only if the Central party is safe. The intent is also to keep Central counterparty  to be remote from bankruptcy and thus immunize it from default. For this CCP needs to have line of defence. Each of the parties trade with CCP and even though the trade is long-dated, those are marked to market every day and settle up with CCP. This is not how futures work. This entire process expedites the CCP’s ability to address any default immediately. Secondly, CCP maintains buffer to offset the default risk which is called risk/initial margin which accounts for the fact that the market move a bit or substantially. Third thing in the line of defence is guarantee or default fund which comes into involvement when these risk margins are not sufficient to handle the default risk. 

    

So the parties (which may include hedge funds, banks, and asset managers) now face new kind of risk. Earlier, the main exposure was to credit but the price of moving out the credit part out is liquidity. The market is going to move to either side of the pendulum every day and this calls for cash in hand. There are varieties of different entities providing services in different types of derivatives. Following figure shows how all these stakeholders' roles fit together. 

An important distinction among these is the degree to which they allow cross-margining. Cross margining is the ability to offset the marginal requirement of product trading with one in another product with the same counter party. The main three CCPs are CME, ICE and LCH.Clearnet. At the moment, the flow is really with these big three. LCH has cleared around 40% of IRS (interest-rate swaps) market. ICE cleared around 65% of the CDS market. Credit Valuation and Adjustment (CVA) is the mechanism that the banks used to account for the possibility of the counterparty default when they do derivatives trading with bilateral counterparties. This was very relevant when the main risk was credit. As we move into CCP world, arguably CVA becomes less important. The majority of dealing houses have moved to OIS (Overnight Index Swap) for the valuation of collateralized derivatives, however no such consensus exists for the valuation of uncollateralized derivatives. The recent Libor scandal has put the spotlight on the debate around how banks measure their cost of funding and highlighted the possibility of banks introducing a funding valuation adjustment (FVA) to more accurately reflect the cost of funding in their valuations.

All these are measures for standardized derivative products. There is a need for managing more complex products. It is expected to have higher margins for non-cleared swaps. CFTC is suggesting that it may double the initial margin for the non-cleared swaps. So the complex derivative trading is expected to become more expensive. Therefore, the P&L is going to be affected for these entities.

Making OTC derivatives more accessible to the investment community poses significant risks, as well as benefits. Whenever more firepower is vested into the hands of investors, the risk that they will do themselves damage increases. Although a number of factors will help to mitigate those risks—including increased transparency, the attraction of new forms of liquidity, and a central clearing structure to minimize bilateral counterparty credit risk—there is still the possibility that a rush of interest in OTC derivatives stokes the next bubble. 

Business Imperatives in the Era of Analytics

There has been a lot of buzz about Big Data. It is claimed to be the next frontier of innovation, competition and productivity. It is a growing torrent..!! Lets see whether there is dearth of evidence for all these claims. Per a recent research by McKinsey, 30 billion pieces of content are shared on Facebook every month. Around 40% project growth in global data generated per year compared to 5% growth in global IT spending. Approximately $600 billion is the potential annual consumer surplus from using personal location data globally. Around 60% can be the potential increase in retailers’ operating margins possible with big data. Per IBM recent report, 90% of the world’s data was created in last 2-3 years. This is just the tip of the iceberg – of the amount of data we have and the potential it has.

Big Data and analytics actually have been receiving attention for a few years but the reason of discussion is changing. Earlier companies used to think how to get the relevant data and use analytics to make sense of it. Now, companies see that their competitors are exploiting the data and they are left behind. Companies get many advantages from using data and analytics – how they improve in pricing, how they can offer better customer-care, how they can improve in segmentation and how they can optimize inventory management. The key is to focus on the big decisions for which if the companies had better data, better predictive ability, better ability to optimize, they would make revenues/profits. There is no point of mining data where it would not fetch worth revenues or profits.

Key success for exploiting data analytics comes down to three things – data, models and transformation. Data is the creative use of the internal and external data to give a broader view of what is happening in the organisation (e.g. operations, customers, marketing, sales, etc.). Modeling is using this data into workable model that can either help them predict better or allow optimizing better in terms of business. Finally transformation – is about enabling the company to adapt the company to take advantage of this data in models – such as using tools for managing and monitoring. For implementation, companies need to have people who have sense of business as well as understand analytics else they will end up making naïve business decisions. Besides, companies need to focus – meaning do not try to change several things at once rather just try to and focus on 2 or 3 things.

Analytics can help companies synthesize data into insights – help in key decision-making, thus increasing revenues and profits. In top performing companies, analytics have replaced intuition as the best way to answer questions about what markets to pursue, how to configure and fix price-offerings and how to identify where operations can be made more efficient in response to cost and environment constraints. Many business leaders are anxious to capture the benefits of new intelligence but they need to take analytics the full distance. Top companies are enacting their business analytics and optimization vision, making it possible to operationalize decisions and optimize business performance across the enterprise. To achieve this, they are using various tools, effective governance. Driven by intelligence, companies can better anticipate supply chain constraints and competitors’ countermoves. A focus on driving change – in people, business processes, in organisation structure and management systems – has the greatest impact on achieving breakaway performance.

This is the time when organisations should institutionalise data-driven decision-making rather intuition and harness Big Data. To find the ways that are most appropriate for a given company, leaders need to figure out how the company’s data might address specific business needs. But three of the ways that every organization should think through are:

• Creating a data-driven culture

• Informationalization

• Big data/advanced analytics

Putting data to work requires changes in how companies typically operate when it comes to data. It takes a laser focus on data quality, disciplined data-management, the right talent and a facilitating organizational structure. These are, certainly, the business imperatives if the companies do not wish to be left behind in the era of Big data and analytics.

Why does the organisation’s IT Strategy go wrong?

In this era of economic fragility and ferocious competition, often IT takes the biggest hit when companies attempt to curb the costs. It wont be wrong to say that it is a totally foregone debate how important is IT for the success of any company. Despite the adverse economic ambience, IT remains fastest growing outlays for most of the companies.

Mostly companies fail to understand the business needs and thus end up wasting resources on services/projects which do not meet the business requirements. The scrimmage over the allocation of resources leaves IT and its business clients (which may be different department within the same company or altogether external clients) in delirium. Companies invest a lot of time, money and resources on IT projects which are actually irrelevant or not of much relevance for the business needs. IT strategy within any company cannot exist in isolation. In order to attain strategic alignment, it becomes paramount to list down lucidly the business objectives/goals through IT-business coordination and collaboration. Each of the ongoing and upcoming IT projects needs to be evaluated under the microscope for its relevance to business, cost of project, resources and time required and of course the risks involved. Based on the parameters such as regulatory necessities, business criticality, etc., all the projects should be segregated into “must do”, “good to have” and “can be postponed” categories.

For any company, the key questions to be asked are – is there a clear IT strategy for the firm? Does it align with the business goal/strategy? Whether IT services for the company is captive or outsourced, the organisations must check the IT spending because many companies get IT driven or are struck with IT wave. Many companies often find their IT expenditure skyrocketing and the stiff challenge they face is to curb the IT expenditure. In doing so, they generally cut the expenditure haphazardly, curbing many critical IT projects hurting the business. This calls for robust tracking tools to monitor IT usage, making IT expenditure more transparent. It is also required that companies periodically relook their IT and find whether they are using technologies/software which are outdated as they do for their operatives in other departments. As we might have witnessed, legacy systems continue to exist in many big organisations e.g. many banks still maintain their databases in mainframes. On one hand mainframes are supposed to be most secure, on other their maintenance costs are very high which is why organisations are migrating possible applications from legacy systems to open systems or rather new platforms which offers safe, secure environment– having low maintenance costs. The organisations should regularly perform IT security and risk assessment. This leads to the complexity of maintenance, migration and upgrade of company’s initial base of IT assets. Streamlining the entire system, considerably, simplifies the businesses’ underlying IT need.

The role of IT is to enable the business by ensuring that there is a strong and clear relationship between IT investment decisions and the organization’s overall strategies, goals, and objectives. To achieve this, organisations must ensure that IT funding and solutions align with business strategies; they must organize IT's financial, technical, and human resources around business value; and they must provide oversight of IT-related activities to manage IT-related risks. Conclusively, in my opinion a company’s IT strategy can be successful if it is able to answer following key questions (which they, often, dont):

•  Is there a clear IT strategy aligned with the business strategy, goal and objectives?
• Where is business, voraciously, consuming IT costs and what is driving these costs?
• Is it easy and efficient (including cost-effective) to implement IT changes or new IT infrastructure?
•  Are there clear procedures/tools to monitor IT expenditure and are they enforced?

Does India need social revolution to eradicate social parasites?

Multiple international and domestic media reported and for a moment, we also assumed that the horrible Delhi attack could prove a turning point for India's women as well as the Indian society. But things stand more or less same. Myriad (mis)incidents have occured since then. A society, where the fear of wrongdoing is absent, can never get rid of social evils. Why do the social parasites such as Raj Thackeray, Owaisi, Asharam Bapu and many more prosper? Few doing trade of hatred, few prospering in the name of God, few doing business of ethics and so on. They all know - despite all the wrongdoing in daylight - they will not be convicted and will walk free untouched and unruffled. When we introspect - who is responsible for all these - is it the lame government (no matter who is heading it) or us who elected them?

What is the solution of all these? Do we need a social revolution which will transform the society and thus eradicate the social evils in the entire nation. When Anna Hazare led campaign against corruption - we thought that was the one. We had similar feeling after the nationwide agitation against the Delhi gang-rape but these have become as periodic and repetitive as these heinous crimes. Moreover, this is the only way civilized citizens can exhibit their frustration and agony because we dont belong to the same class as these social parasites do.

I, candidly, don’t know who is the culprit, whom to blame and what is the solution but what I firmly know is that whenever I say I am Indian – these heinous acts, which occur everyday, haunt me – countless rapes, relentless politicians doing scandals, hatred speeches just to preserve vote-bank and many more. Do we wish to live in such India or did we ever dream of such India. A UN index in 2011 amalgamated details on female education and employment, women in politics, sexual and maternal health and more. It ranked India 134th out of 187 countries, worse than Saudi Arabia, Iraq or China. In corruption, India is ranked much ahead of most of the nations. Intellectuals may argue and suggest to look at our neighbouring countries, we are much ahead compared to most of them. So my counterargument is do we really look up to live in such ambience where people are deprived of freedom of speech, social media and many similar privileges which we enjoy  OR we boast of a nation which will have biggest economy, total literacy and a crime-free society. Do campaigns, agitation, outrage, microblogging and expressing opinions make any difference? – I don’t have an answer. Certainly, the transformation cannot be done overnight and the journey, indeed, is long. As for now, I can only hope for the best..!!!

EXPLOIT and Explore - Success Mantra of Outstanding Companies

No company can have a stagnant strategy to which it can align perpetually. The operatives in the contemporary highly competitive market are dynamic and are constantly changing. No company can sustain with a rigid strategy. Companies must focus on both short term as well as long term and act accordingly. A long time debate in the field of business strategy has been on exploit and explore. In the domain of product development, we often come across the famous 4 Xs – explore, expand, exploit and exterminate. Both are considered essential for any company to prosper the business. By exploration, we mean innovation, risk taking or even players from altogether different business domain and at times even reinventing. They need to look for new opportunities which may be in terms of geographic market area, customer segment or avenues of operating line of business. Exploring these new possibilities, basically, prepares for them for the unforeseen future which can often be adverse. While exploitation points to leveraging the certainties to generate revenues/funds to survive today (and for future too) and also imitating the best practices of the competitors.

Companies have been able to gain market share as well as revenue through exploration. It is widely assumed that innovation leads the way to success which is why a lot of companies spend a lot on research. Unfortunately, we don’t have a single metric or parameter to gauge the exploration quotient or score of the companies on any scale. Albeit, generally a company is said to innovative based on the number of patents it owns, the expenditure on research and development and the new products it comes up with. Of late, Apple has been on the innovation spree and has been credited as the most innovative products – courtesy to gadgets like iPod, iPhone, iPad, etc. which revolutionised multiple industries such as music, mobile telephony.  If patents are weapons, companies such as Motorola, Intel, Canon, Lucent (originally AT&T Technologies) are armed to teeth. No wonder, these companies have tasted success from time to time.

On the other hand, companies have been successful exploiting the current conditions. Companies tend to improve their operations, marketing and sales force and business processes. Amazon rise is heavily propelled by his excellent supply chain. McDonald’s has always focussed on gaining excellence in the operational. Nokia is another example in this list.

In an ideal scenario, companies should keep a balance between exploration and exploitation. These two dimensions of business strategy should go hand-in-hand. They should combine the ability to run operations effectively with the capability to develop new fantastic products which would appeal to the customers. Outstanding companies are able to achieve this. Apple’s success cannot be solely attributed to its innovation. It was led by legendary Steve Jobs who improved the operations drastically, understood the call of the hour and was pivotal in shifting the manufacturing base to China. This reduced the manufacturing costs, keeping the margins high. Through, marketing campaigns Apple is always able to maintain the hype before launching any new product. These all contributed to the overall success of Apple. Unfortunately in real world, most of the companies are not able to attain this balance. Exploring new opportunities munches time as well as resources at disposal for improvement of existing processes.

With this practical issue, the debate arrives a point leading to a tussle between exploitation and exploration – which holds the priority. Companies have been able to compensate for exploration by being excellent exploiters. On the contrary, the reverse – exploration does not compensate for exploitation. Many market leaders are more efficient but may not be more innovative than their competitors. They stress on former at the expense of latter though not totally ignoring exploration. Innovation is vital to companies, but also difficult to perform since there are many ways to approach the subject. Besides, there is no control on the results of research while companies can control the operational processes and marketing campaigns. A perfect example can extracted from the rivalry of Glaxo and Wellcome few decades back. Wellcome had always more patents per sale than Glaxo till 1970s but as we know Glaxo was clearly much ahead in the market share between the two. Glaxo excelled in exploiting existing resources through great marketing and more importantly, it was honest to realise its research constraints. Christian Stadler in his book “Enduring Success” emphasizes on the scope of buying exploration capabilities. Continuing on the same set of companies – exploration became part of Wellcome’s DNA as exploitation became part of Glaxo. Glaxo continued to operate on same model – be competent in certain activity and bear the reward. Though it was indulged in research efforts, it was mainly through acquisitions and takeovers. Its most successful product till date Zantac (medicine for ulcers) was developed in laboratories of Allen & Hanburys, one of Glaxo’s acquisitions. When the expiration year of Zantac was approaching, Glaxo was successful in acquiring Wellcome itself thus adding more weapons in its armoury. It continues to grow and focus on research through taken – an example of late was acquisition of SmithKline Beecham.

Nonetheless, no company should do an excessive exploration. An overkill of innovation is most likely to backfire as was the case in Ericsson. Ericsson was pioneer in multiple technologies e.g. GPRS, 3G, etc. All this was done at the expense of exploiting current market. Huge expenditure on research and excessive bet on future technologies hit its business hard and it had to combine with Sony to save its mobile business.

Subprime Crisis - My Take - Critique

No doubt, Dodd-Frank Act brings up recommendations with good intention to devise tools to address the concerns raised during the financial crisis and also bestows government powers and other tools to the regulatory system to deal with the risk. It also introduces the funeral plans to dissolve the large financial companies/institutions which would certainly help in demystifying their organisational structure.

Dodd-Frank Act, in reality, does little for the government guarantee problem knowing that it has been the part of the financial system for quite long time. It also does not attempt to reform the government sponsored enterprises (GSEs) which were heavily exposed to the guaranteed debt. There is no attempt in Dodd-Frank to address the key problem of government subsidization of mortgage risk, and the exposures of Fannie Mae , Freddie Mac and the Federal Housing Administration are still growing.

The Act recommends a plethora of government powers and agencies/entities with authority in the financial system and economy. The Act requires over 225 new financial rules across 11 federal agencies (Source: The Economist). There has been minimal attempt at regulatory consolidation. The roles of many of these entities are overlapping and may lead to a lot of confusion and in addition, making their funding (often requiring Congress approval) more exotic. Consequently, the financial sector will have to live with the great deal of uncertainty that is left unresolved until the various regulators (the Fed, the SEC, and the Commodities and Futures Trading Commission (CFTC)(refer to figure below). The problem also lies in the way they operate. With officials given power to regulate more intrusively, it makes their functionary more whimsical and thus may push the financial institutions into more red tape. The lack of clarity which follows from the sheer complexity of the proposal will sometimes will serve for the unreliability.

New Government powers/entities per Dodd-Frank Act (Source: JPMorgan Chase)

The Volcker Rule attempts to prohibit proprietary trading within banks. The fundamental problem with that is that it would be hard to define proprietary trading, because obviously, an essential role of banks is to help make markets in various financial instruments and to execute trades for their clients. The problem that persists is to define the limits of proprietary trading. From the myriad complicated responses that they have received, it has become clear that there is no hope of being able to describe what it is the Act is trying to prohibit in a way that can be predictably identified, so that banks can know whether or not are they are in violation(Source:www.barrons.com). The Volcker Rule prohibits banks from proprietary trading, even if against the value of securities they are underwriting and peddling to the public, just as Goldman Sachs, for one, notoriously did. This is certainly in desired direction, but it does very little about high-frequency trading, the largest and perhaps most dangerous of such practices.

The main reasons for the crisis were housing bubble and imprudent lending to the innumerable borrowers into it. To a certain extent, the responsibility also goes to the US government for this mess. The government legislated a high percentage of private-sector mortgages to be on a non-commercial basis, issued exclusive orders to the large pseudo-private-sector Fannie Mae and Freddie Mac to make the majority of their mortgage loans on that basis and kept interest rates and mortgage equity requirements so low for so long, enlarging the liquidity bubble to the extent of the burst. This was certain to lead to mountains of excess residential housing and worthless mortgages (Source: www.nationalreview.com).

The BASEL III framework proposes a paradigm shift in capital and liquidity standards. Most of the proposals appear unfinished and has a very long time line to implement. BASEL III has scientific approach and proposed measure tools to control the problems. Though a sound prudential framework should focus on the systematic risk but BASEL III mostly focuses on the individual risk of the financial firms and reducing the individual risk may fundamentally aggravate the systematic risk. For example, a bank fails to diversify properly even though it is encouraged to do so. In such scenario, the bank will continue to have the same aggregate risk despite diversifying its idiosyncratic risk. As per BASEL III, the unsecured bonds of the banks are not eligible for LCR while they qualify for NFSR while sovereign debts and cover bonds are eligible under both. This indicates that the supply of covered bonds and sovereign debts will increase generally while the supply for the unsecured bonds will increase only for long term to meet the requirements of NFSR. Consequently, the recommendations in BASEL III to address the liquidity will promote a partial swap on banks’ balance sheets. This increase in sovereign debt will lead to increase in sovereign risk in banking as well as insuring sector. The countercyclical buffers introduced to be utilised during stressed period to offset procyclicality. It is problematic to identify the stressed or bad times and coming up with a figure for the capital buffer to counter losses is extremely challenging. Moreover defining the capital ratios again will not solve the problem related with the capital ratio on RWAs. The new proposal boosts the procyclicality with not even addressing the regulatory arbitrage. Another problem with BASEL III is that it is not a legally binding framework which does not mandates any country to follow. Though intended to be implemented across the globe, there is no way to ensure that it will be implemented uniformly around the world. Besides, the implementation timings will not be same. BASEL III recommends the individual countries to consider increasing their national capital requirements in case of unsafe credit creation. Now, many multinational banks have problems in adhering to the countercyclical buffer of any one country but may need to maintain the weighted average of the requirements in all the countries of operations. This adds to the complexity of the rules.

Few recommendations of BASEL III and Dodd Frank concerned with capital control are not consistent. For instance, BASELIII still relies on the external credit-ratings in determining the capital charges for few assets while Dodd-Frank Act recommends the removal of any reference to credit ratings in federal agency regulations. Besides, there are implementation date differences for few provisions where there are consistencies between BASEL III and Dodd-Frank Act. For example, Dodd-Frank mandates exclusion of preferred securities (e.g trust preferred) from Tier 1 capital and gives a timeline of 3 years to implement exempting the smallest banks. On the contrary, BASEL III sets a longer time line to implement this and does not talk about any exemption.

CONCLUSION:

The crisis of this magnitude having adverse impact across the global economy should be immediately be addressed by the government. The investment banks, credit rating agencies, lenders, mortgage brokers and the federal government were the main causes of the financial crisis. Though many reforms were proposed with each one under the global financial industry’s scrutiny, many of them still have some loopholes. Many inconsistencies too exist among these reforms and need to be aligned soon. Another area of concern which the government need to consider is the implementation of different proposals. There is also a potential threat of overregulation or misregulation and should be addressed properly. At the same time, measuring the efficiency of the regulatory changes contributing to the improvement of the financial sector performance will be a tough task to do. There are still several area which have not been addressed. Few of them are the heavy government debts which may be a big subject of concern. The Financial Reform Act also does not adequately addresses the “too big to fail” problem. Nonetheless, no reform can be perfect and these reforms are intended to be in the correct direction.