Regulatory_Reform

Regulatory_Reform - Overview of the financial services reform bill(as of It is estimated that in aggregate the various provisions within the

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* Based on Wall Street research estimates. 1 Overview of the financial services reform bill (as of June 25, 2010) It is estimated that in aggregate, the various provisions within the legislation finalized on June 25, 2010 will result in a 5% to 15% decrease in earnings for banks and other financial institutions*. It is critical that LMTC clients identify which provisions within the bill are most relevant to their firms, the impact of these provisions on their business model and profitability, the scope of operational and infrastructure adaptations that will be required, and implications on risk and risk management practices. General Overview and Key Outcomes We broadly categorize the newly instated provisions into two categories: I. Specific guidelines for financial institutions that are related to business models, operational reforms and capital treatment, and II. Overarching regulatory provisions intended to enhance safety and soundness of the financial system, promote consumer protection, and redefine supervision and resolution authority I. Specific Guidelines for Financial Institutions Streamlined considerably from its original framework, the new legislation imposes business model constraints and operational prohibitions on banks and non bank institutions regulated by the Federal Reserve. Imposes restrictions on proprietary trading activities. Prohibits proprietary trading activity intended exclusively for profit motives; does allow taking on principal risk for the sake of market making and hedging activities Limits hedge fund and private equity fund sponsorship to levels and terms that may not impose institution wide threats (investment capped at 3% of Tier 1 capital; ownership capped at 3% of fund) Relevance: May result in a shift in business models and profitability away from reliance on proprietary trading activities. Downside impact on pre tax income estimated at up to 5% for certain large integrated financial institutions.* May impose restrictions on activities and position taking based on (i) material conflict of interest, (ii) high risk assets or trading strategies, (ii) general safety and soundness concerns This may selectively require disposition of certain assets (at a time when valuations may or not be favorable) Business model guidelines – derivatives intermediation. The legislation changes the context within which financial institutions may act as derivatives intermediaries. However, this too was streamlined and modified significantly from the originally proposed framework. Allows banks to serve as swaps dealers for certain derivatives Rate products: Yes Foreign exchange: Yes Credit default swaps: Only on cleared CDS referencing investment grade securities Commodities swaps: Only gold and silver related Equity related: No
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* Based on Wall Street research estimates. 2 Activities associated with other derivatives will have to be housed within a separate affiliate of the BHC
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This note was uploaded on 10/16/2010 for the course IEOR 4729 taught by Professor Leotilman during the Summer '10 term at Columbia.

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Regulatory_Reform - Overview of the financial services reform bill(as of It is estimated that in aggregate the various provisions within the

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