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Dodd-Frank (and EMIR): the unintended consequences

I was going to write one final piece about Japan, on a more
serious note, as the SIBOS week really brought home to me the fact that there
is a two speed financial world being regulated under one regulatory agenda.

There are the growth markets of Asia, Africa and Latin
America, who want regulation to encourage banks to support growth; and there
are the recession markets of Europe and America, who want regulation to manage
austerity and budget cuts and avoid unacceptable risks within the financial
system.

The result is that you have markets that do not work at all.

Banks and hedge funds will purely morph to where the money
is – Asia and its allies – and get out of the markets where there is no money,
such as Contintental Euorpe.

As I say, was about to write this piece when I read the Wall Street Journal’s headline opinion piece,
which pretty much said what I was going to write.

Therefore, if you missed it, here’s the real impact of
Dodd-Frank (and the European Market Infrastructures Regulation, EMIR):

Dodd-Frank's Financial
Outsourcing

New rules push business offshore, while taxpayer risk
stays home.

President Obama likes to describe a mythical corporate tax
deduction for moving jobs overseas. But a real-life Obama policy is already
encouraging financial transactions to occur outside America. Two big
international banks now say they won't participate in the U.S. swaps market.
This follows an October letter from foreign regulators warning Commodity
Futures Trading Commission Chairman Gary Gensler not to blow up the global
derivatives marketplace.

Singapore's DBS and Sweden's Nordea
Bank
 recently announced that they won't register in the U.S. to trade
swaps. These are contracts in which two parties exchange risks, for example, by
trading a fixed interest rate for a floating one. DBS doesn't see the
"immediate commercial benefits" of making the investment necessary to
comply with new U.S. rules, said Tse Chiong Thio, managing director of DBS
Bank.

Since Mr. Obama signed the Dodd-Frank financial bill in
2010, Washington has embarked on a rule-making frenzy, and Asia is looking
better all the time. "Regional markets are substantially more important to
us, and we are working with regulators who are developing a framework across
this region," Mr. Thio said at a meeting of the International Swaps and
Derivatives Association in Singapore.

The CFTC's Mr. Gensler dismissed the news from DBS and
Nordea by saying, "Our goal was to get the largest banks in the swaps
business and I don't think either of those banks were." For the record,
each one is the largest bank in its home country.

They may not be huge players in swaps, but is it Mr.
Gensler's job to push companies he regards as minor leaguers out of the U.S.
market? With freer markets overseas, newer firms may someday grow larger than
even the likes of Goldman
Sachs
.

Meanwhile, other regulators are worried that Mr. Gensler's
new rules on everything from trade execution to price reporting to customer
disclosures will often conflict with foreign regulations. In last month's
letter to Mr. Gensler, top financial regulators from the European Commission,
France, Japan and the U.K. asked him to take a deep breath before imposing
burdens that could disrupt international markets. The regulators wrote that
"we would urge you before finalising any rules or enforcing any deadlines
to take the time to ensure that US rulemaking works not just domestically but
also globally."

The irony here is striking and not only because Mr. Obama so
often contrasts his foreign policy with a unilateralist caricature of George W.
Bush. One of the principal arguments for enacting Dodd-Frank in haste in 2010
was that the world was moving toward similar rules and the U.S. needed to go
along. In a hurry to exploit ebbing Democratic control of Congress, co-authors
Barney Frank and Chris Dodd pulled a legislative all-nighter to write the final
draft.

Some Americans may not mind this global financial flight,
having bought the Democratic history of the financial crisis that ignores the
housing meltdown and blames the financial instruments that reflected it. Others
may conclude that big derivatives books at banks scare regulators into rescuing
them when they fail, and therefore a smaller market is a taxpayer protection.

But while pushing more
derivatives business into foreign jurisdictions, Dodd-Frank is simultaneously
raising taxpayer exposure to this market. In July, the Obama Administration
formally inducted eight firms into the too-big-to-fail club, including several clearinghouses
that stand behind derivatives trades. Now officially designated as
"Financial Market Utilities" that are "systemically
important," these organizations will enjoy emergency access to the Federal
Reserve's discount window.

Taxpayers will no doubt be thrilled to learn that along with
too-big-to-fail banks like Citigroup and Bank
of America
 they are also now standing behind Wall Street trading at
companies they've never heard of, like CLS Bank International and the Options
Clearing Corporation. And while we're on the subject, can someone explain how
the world would come to an end if ICE Clear Credit or even the much larger CME
went bankrupt?

Mr. Obama's financial regulation is producing an amazing
trifecta: anger among our international trading partners, a less prosperous
financial market at home, and a larger taxpayer safety net. We'd call this more
evidence of the law of unintended consequences, except this may be exactly what
Dodd-Frank's authors intended.

 

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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