Wall Street Reform: The Dodd-Frank Law

14 08 2010

It’s surprising to me that the Dodd-Frank Wall Street reform law that was signed into law on July 21, 2010 has not really gotten a lot of press after the fact. There was so much hype surrounding what should and should not be included in the bill, that now that it has been approved and signed, not much attention has been paid to what exactly is going to happen next.

There are several items in the law, so it will have to be phased in over time. There are several details that have been left to federal regulators who must write specific rules to support the law.

The Volcker Rule, subject to intense debate was amended prior to President Obama signing the reform into law. Many financial service companies felt it was the most harmful portions of the proposed bill. The Volker Rule would have prevented banks and insurance companies from investing their assets in corporate bonds and traditional stocks, which make up a sizable portion of many firms’ investing portfolios. By amending this rule, financial firms will can invest wisely and remain competitive within the industry.

One of the immediate actions to take place is that the Federal Deposit Insurance Corp. (FDIC) will create a way to liquidate financial firms that are failing and threatening the financial system. The FDIC also mandated that the temporary raise to insure individual deposits from $100,000 to $250,000 will become permanent.

By October of this year, a new council of regulators will meet to begin determining which firms are big enough to pose a risk to the economy and financial system.

By the beginning of next year, shareholders will get to vote on executive pay and the packages that are created for executives leave the company.

Within the first year of this law being signed into place, a couple of significant items stand out. The FDIC will also release new rules that restrict the fees paid to banks and credit unions by retailers on debit cards. In addition to that, firms that sell Mortgaged Back Securities, such as Collateralized Debt Obligations (when mortgages are bundled up and sold as securities – these instruments were one of the major culprits of the recent economic crisis), will have to keep 5% of those mortgages to retain part of the risk.

The Commodities Futures Trading Commission and the Securities and Exchange Commission have a year to create rules to enforce many derivatives to be traded on clearinghouses and exchanges, and to figure out how much money firms must post as collateral for the derivatives.

Other rules, such as the limitations on bank ownership of hedge funds could take several years, as the new law gives banks the opportunity to delay the full impact; this may be to avoid a shock to the financial system.

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