The pending presidential election has led to a lot of speculation about the future of securities regulation. But whether President Barack Obama is re-elected or if Mitt Romney wins the White House, Dodd-Frank is here to stay.
In the event that President Barack Obama gets a second term, the Dodd Frank reform measure will most likely continue on its slow track of implementation; albeit the financial industry will continue to push back against regulatory reform by bringing legal challenges.
In this regard, the financial sector has won some battles as the courts have set aside the SEC’s “proxy rule” as well as the CFTC’s position limits rule. In the case of the former, the winning issue was that the SEC had failed to perform a sufficient “cost benefit analysis.” And most recently the courts also found that the commodity watch dog’s limits on futures positions were “unworkable.” It is safe to say that the battles in courts will continue to define Dodd-Frank and thus, shape the future of securities regulation.
As for Gov. Mitt Romney he has said that would repeal the reform measure. But this is highly unlikely given that key provisions with respect to swaps regulations have now finally been written and approved by the federal authorities. Moreover, the Consumer Financial Protection Bureau has been up and running for some time and continues to take on regulatory purview of matters that were handled by the FTC. The only way to stop the CFPB would be to de-fund the agency; and that cannot happen unless the GOP gains a majority in the Senate. As far as derivate markets, both candidates support making the derivatives markets more transparent and more closely watched by regulators.
Concerning regulatory burden on banks and ending “too big to fail”, candidates disagree on treatment of banks under the Dodd-Frank; however, both seem to generally agree on federally mandated capital requirements, leverage limits for banks and risk retention on mortgages part of new banking regulation.
The other key regulatory initiative waiting in the wings is the Volcker Rule that is aimed at reining in proprietary trading. The question remains as to how stringent that rule will be. President Barack Obama supports the rule, while Gov. Mitt Romney would seek to replace the rule as part of his repeal of Dodd-Frank. In reality, some large firms like Goldman Sachs and Morgan Stanley have already spun off their proprietary trading platforms, so how much bite the final rule will have is hard to say.
As far as government agencies, it is the attitude of regulators that will be affected the most. Or more specifically, the vigor with which regulators do their jobs and enforce the rules. With Barack Obama, government agencies will keep their confidence, but will not get a green light of unlimited authority. With Mitt Romney, agencies confidence will be tamed, but not completely. And at the end of the day, it’s not the financial system that we have to worry about, but court and political systems.
In short, political turmoil stands in the way of the financial markets’ recovery. There is a behavioral (politics) vs. cyclical (financial markets) conflict. Obviously, no financial company will say that they oppose regulation, but that it needs to work with financial industry; and not against it. In any case, if nothing else, the election will bring closure. One way or another, markets will move.
