The election of Donald J. Trump for US president has left many market practitioners scratching their heads and wondering, “What’s next for financial regulations?”
Recent headlines show that Trump has plans to dismantle the Dodd-Frank Act, which he feels has been a roadblock to economic growth. It’s also been reported that the new president elect is considering Paul Atkins as commissioner for the SEC, a former regulator who has a reputation for a light touch. In a recent YouTube video, Trump lays out his policy plans stating that for every one regulation that is added, he plans to take two away.
European banks alike are taking a wait and see approach to determine what a Trump election will mean for Basel III revisions. A key point of contention has been whether banks should be able to use their internal risk models to determine how much capital to allocate for certain types of lending or securities, a position the EU favors; or whether a standardized model set by regulators should be adopted, a stance the US has taken. 1
So will Trump’s presidency put an end to the tight regulation we’ve seen post-crisis? The answer is not quite clear as of yet. But despite this fact, we’ve still seen an upward trend in the markets. Following the election, stocks like Goldman Sachs rallied over 15% in anticipation of looser regulation and pro-business policy. Additionally, strong potential hires for cabinet positions, such as Mitt Romney who is under consideration for secretary of state, are expected to positively impact the markets.2
On the other side of the coin, one could argue that rigorous regulations aren’t going anywhere. Since the crisis of 08/09, there has been a massive industry built on the back of financial regulation policies, and there is a serious lobby now to ensure it stays front and center.
Even aside from coping with risk and monitoring regulations, business demands such as increasing complexity in the marketplace and a need to handle growing transaction volumes have digitized much of the financial industry. It is doubtful that this digitization would be undone.
Innovations in FinTech/RegTech have also meant that the level of supervision that wasn’t possible 10 years ago is now more easily deployed. The demand for transparency is not going to fade anytime soon—even if the regulators don’t demand it, clients will.
Transparency is a big part of effective risk management. To have transparency, you need to be working with consistent data and assumptions in the front, middle and back office. This will help you reduce model risk and help you get a consistent view of risk across the organization, thus empowering you to make better business decisions.
The truth is that strong risk management is not only important for satisfying regulators, but becoming pivotal to the investment process itself. It can help firms generate higher returns, limit trading losses, improve margins and raising the confidence of clients, investors and stakeholders.
Some of today’s innovative systems offer access to risk analytics that not only help you monitor performance, but really drive it. This is done through the use of intra-day metrics that cover everything from vanilla instruments through to complex structured products and hybrids.
In best-of-breed risk systems, models are documented in detail, with citations that reach deep into original sources. Model validation is fast and simple. Additionally, leading systems ensure that all data –trades, prices, intermediate calculations, and results –are accessible for study and deconstruction, and fully auditable for validation and reconciliation. Analysts, portfolio managers, and traders are confident that the models they use are backed by documented research and testing – and consistent with their firm’s current investment policies. Such transparent, well-documented models are considerably easier to defend with regulators and investor alike.
Regardless of whether regulations ease up or stay the same, all of us in the industry must find some way of adapting. To some of us, regulation is the bane of our lives, for others it keeps us in jobs and creates new opportunities. Whatever your view, the element that binds us together is that we all have to dance to the tunes being played by the big regulatory bodies worldwide. To do this successfully, firms need to be armed with the right set of future-proof systems and tools that allow them to agilely respond to whatever changes may come their way.
Want more information on how effective risk management can help you better manage regulatory demands, all while carving out competitive advantage? Check out a video where my colleague James Church explains: The Five Pillars of Risk as Competitive Advantage