Asking whether the ongoing regulatory reform is reducing systemic risk, Tim Ryan, CEO of the Securities Industry and Financial Markets Association (SIFMA), pointed to recent industry developments in a speech at the SIFMA Tech 2012 Conference today.
Since the end of 2009, Ryan said, Tier 1 common equity capital for the top 19 bank holding companies has increased by $300 billion, and more than 90% of Troubled Asset Relief Program (TARP) capital funds have been repaid, profiting taxpayers $19 billion in interest, dividends and warrant sales to date.
As more than 400 Dodd-Frank Act regulations, including centralized derivatives clearing, are set to go into effect, SIFMA is providing regulators with the information they need to get these new rules right and to consider costs as well as benefits, Ryan said.
Among these initiatives is a prototype for a global legal entity identifier (LEI) utility that SIFMA has worked with a global industry coalition to develop. This tool will provide regulators with a first-of-its-kind tool for managing systemic risk, as well as help firms manage counterparty exposure. Ryan also called for a centralized body that will manage LEIs, and commended the Financial Stability Boards recent recommendation to the G20 of a central operating unit.
For more on LEIs, see Standardizing legal entity identification, Winter 2011, Global Custodian.
Without a central authority to ensure consistent data quality controls, well end up right where we are today, with a fragmented system of identifiers that vary from firm to firm and region to region, Ryan said.
SIFMA is also working with the Depositary Trust & Clearing Corporation (DTCC) and the Boston Consulting Group “to review the potential costs and benefits of a shortened settlement cycle in the U.S., Ryan said, which could potentially reduce risk in the markets and potentially reduce capital requirements at the utility.” DTCC is undertaking a cost-benefit analysis of switching to equities settlement on T+2, T+1 or T+0 in the U.S. compared to the current T+3.
Ryan also commented on central clearing of OTC derivatives, which will continue to require extraordinary resources. The build-out of new trading platforms and execution facilities is underway, but much work lies ahead in creating this new infrastructure. The details of how collateral will be managed and optimized, what role all parties will play in this new structure and how the issue of certainty of execution will be resolved all need to be addressed.
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