Reducing Regulation
Carmen Lelli
Regulatory Professional (Trading and Markets) Seeking New Full-Time Remote Opportunity
Within the last couple of years, some tier 1 banks have ventured into proprietary trading while some others have not made the same move. Why is that? The answer to that question rests in the world of regulation.
Under the Dodd-Frank Act, banks were prohibited from proprietary trading.. This regulation was introduced after the 2008 financial crisis. However, between 2017 and 2018, sections 619-700 of the Dodd-Frank Act were repealed/removed. These particular Sections of the Act expressly prohibited Banking Entities from engaging in such activities. This opened the door, however the SEC, FDIC, Federal Reserve, Treasury Dept. and CFTC, collectively known as (The Agencies), placed some restrictions surrounding this new allowance provided to Banking Entities.
The Agencies created three tiers of Banking Entities and each tier is required to supervise its proprietary trading activities as prescribed. Those Banking Entities that fall into the most stringent category may continue to refrain from engaging in proprietary activities due to the high standard of supervision that is now required by the Regulators, outlined in Table 1.
Table 1
There is nothing preventing a tier 1 from engaging in proprietary trading activities, however any mover would need to spend some considerable time on the compliance requirements. Additionally some banks may be reluctant to take any risk in this area because of the potential PR impact. Imagine, if you will, what someone in the general public who understands the dangers associated with this type of move, may think. Some may be skeptical about investing with that Banking Entity or even leaving money on deposit with a Banking Entity.
The changes to Dodd-Frank occurred in 2018. Will more and more banks jump on the trading train? Even with the three tiers of supervision, can there still be a financial crisis because of it? We’ll need to let a few more years pass by before we find out the answers to these questions, however we do know one thing; banks have already climbed aboard the trading train, and it’s very possible that in the future the desire to do so may grow.