Global regulatory reform is presenting major compliance challenges for financial-services firms. SmartBrief caught up with John Wisbey, CEO of Lombard Risk, to learn what his firm is doing and hearing in the marketplace.
What aspects of global regulatory reform are firms overlooking?
One thing people haven’t grasped is the extraterritoriality issue. Some people in Europe think the Dodd-Frank Act has absolutely nothing to do with them because it’s American legislation. They are wrong. It absolutely does affect them. They are trading with counterparties in the U.S. That’s probably one of the biggest things I see people overlooking. People are shocked and wondering how it could apply to them, but it does.
There are stories out there about some firms working to get ahead of the curve so they will have systems in place once regulations governing over-the-counter swaps are finalized. Others are taking a wait-and-see approach. They figure they can catch up when needed, or they are hoping the rules will never be finalized. What are you seeing in the marketplace?
The very large banks clearly have programs in place because they absolutely know that they’re going to be classified as swaps dealers. What’s harder is if you are someone in the middle and you just don’t know. Why would you invest an immense amount of money if you might not have to comply with some of the rules? The larger the firm, the readier. But then the question is: Does the firm go with the tactical solution first and then do the strategic solution later? They can cut and paste stuff together when they have to meet the deadline, but that might not be the long-term cheapest option. I suspect that’s what’s happening. A lot of people are in execution mode to make sure they can comply, but they might have done it quite quickly. Many of the smaller firms need help because they realize it will be an ongoing expense and they want to find a more robust way going forward.
How does Lombard Risk’s Dodd-Frank Act Engine help solve this issue?
With all of the regulatory reform taking place worldwide, banks will have a big obligation to do transaction reporting in various countries. A bank doesn’t want to have one technology for Dodd-Frank, a different technology for Europe and another one in Asia, and, by the way, each Asian country. We’ve been addressing that by building an event engine that can take information from wherever there is an event and put it wherever it needs to go. It could be reporting for the Commodity Futures Trading Commission, or it could be reporting for an Indian regulator. That is the solution we are using to approach this challenge.
Were any of the reform initiatives worldwide — Dodd-Frank, the European Market Infrastructure Regulation, Basel III, etc. — particularly difficult to solve on the back end when it came to designing the system?
The whole thing is still evolving. EMIR has just been published, so no one is complying with EMIR yet because they don’t need to. There will be some similarities. Regulators are trying to not have incredible differences between one another. We’ll see if they succeed. Their thought processes are similar, and the time scales are somewhat similar. So I guess there will be mostly common threads with a few local variations.