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Tuesday, April 8, 2014

2014 regulatory reforms that impact financial markets

Regulatory reform has the potential to significantly impact the financial services industry, financial markets and the systemic functionality of the economy. During the Clinton Administration, housing industry laws were made more flexible, and banking de-regulation also occurred. However, according to MoveOn.org, the negative effects of this de-regulation was not the former President's fault, but rather Republicans who drafted the Gramm-Leach Bliley Act. Regardless of who's fault it was, laws such as the Glass-Steagall Act that were enacted following the 1929 stock market crash were repealed under the new law.

During the 2000s further problems took effect that contributed to the housing bubble that propelled the U.S. in to the Great Recession of 2008. The New York Times suggests this included loose Federal Reserve monetary policy and poor executive administration. Since then, further policies and laws have been enacted to remedy the vast and far reaching consequences of over-leveraging, predatory lending practices and weak oversight of large scale commercial enterprises. These new rules continue to be implemented and refined.

Several possible U.S. regulatory changes could influence the financial services sector this year. Among these is possible Transatlantic free trade. However, the U.S. position on Transatlantic free trade is one of that seeks a mechanism through which to trade rather than a redefinition of U.S. financial services regulation. In other words, it seems as though further restricting of the U.S financial services industry is not an easy proposition for the European Union to advance.

An additional area where new rules may be enacted is SWAP transactions. According to the Managed Funds Association slide show below, an increase in reporting requirements and conduct obligations may occur. The result of such changes could elevate legal and financial risks surrounding the disclosure of transaction details.


Another important area of regulation is derivatives trading. Since not all of the Dodd-Frank Wall Street Reform and Consumer Protection Act has been implemented, a change to capital requirements and ownership allowances could have substantial impact on investment banking revenue generation. One such related rule that has taken effect is the Volcker Rule. This limits the independent trading activity of financial institutions.

It also seems apparent that the U.S. Internal Revenue Service seeks to gain stricter control over foreign investing activity in the U.S. More specifically, refining of the Foreign Account Tax Compliance Act implementation process and "an update to the Internal Revenue Code, which imposes withholding taxes on non-U.S. investors that receive dividend equivalent payment on U.S. source income." Since the federal government continues to operate with an annual budget deficit, finding ways to increase tax receipts is a way to help reduce the growing national debt.

Additional financial reforms in 2014 affect the European Union and any financial impacts it has on U.S. companies and markets. Among these possible changes are a tightening of banking structure via a forced separation of banking activities from credit institutions. In other words, it could become more difficult for financial institutions to leverage trading via a less close knit relationship with credit organizations. Increased transparency regulations also seem to indicate a closer watch on the conduct of financial institutions.