By Sean O’Sullivan, Director, TPI
The finance reform bill currently awaiting final action by the U.S. has been delayed for a number of reasons and has seen significant change during debate this summer, including the removal of a proposed US$19 billion tax on banks. Overall, the legislation would overhaul U.S. financial regulations at a level not seen since the 1930s. It proposes to close holes in regulation and to curtail some trading practices that many believe led to the crisis in the financial markets in 2008.
Today’s TPI Top 5 outlines major components of the bill and their potential implications for financial services companies that outsource.
1. New regulatory authority. A "too big to fail" provision would give regulators new authority to seize and break up large financial firms that could cause systemic risk to financial markets and the overall economy. According to The Wall Street Journal, the ratings of firms historically deemed "too big to fail" could be downgraded and, therefore, would incur higher borrowing costs that would put pressure on both margins and profits. As vendors see more risk in large firms, will they use price increases as a mechanism to mitigate the risks?
2. Derivatives. The bill would require most derivatives trading to be executed on a public exchange as opposed to the current method in which derivatives trades are completed privately between banks and customers. This provision has come under scrutiny because of enforceability issues and questions about whether or not all derivative contracts would be posted on a public exchange. Will a new level of compliance be required to conform to new regulations?
3. Financial stability council. A new board would be established to recommend to the Federal Reserve stricter regulations on capital and leverage and other requirements for large firms that are considered a threat to the financial system. An additional level of reporting and compliance may be required to satisfy these new regulatory requirements.
4. Hedge funds. Hedge funds with more than US$100 million under management would be required to register with the U.S. Securities and Exchange Commission as investment advisors and disclose information about their trading and portfolios. The funds would face additional regulatory, compliance and reporting requirements that could provide an opportunity for service providers to bring best practices and solutions to the outsourcing industry.
5. Insurance. The bill would create a new Office of National Insurance within the U.S. Department of the Treasury to monitor the insurance industry. This new department would flag insurers that should be treated as systemically important and coordinate international insurance issues. This new entity would produce a study and recommendations to Congress on ways to modernize insurance regulation.
TPI’s seasoned Financial Services outsourcing experts can help you achieve your sourcing and governance goals through objective advice, knowledge of your industry and experience with arrangements from simple to complex. E-mail Sean O’Sullivan, Director, TPI, or phone him at + 1 347 949 0713 to learn more.