Move over, Obamacare! The Donald is looking to repeal Dodd-Frank rules next, and this might have an impact on the U.S. forex industry. Here’s what it’s all about and what the GOP has in mind:
What are the Dodd-Frank regulations all about?
For the newbies out there who haven’t been hooked to the markets for nearly a decade, the Dodd-Frank Wall Street Reform and Consumer Protection Act was created in the post-recession era in order to prevent another financial meltdown from happening.
In particular, the legislation aimed to “promote the financial stability of the United States by improving accountability and transparency in the financial system, to end too big-to-fail, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”
With that, a number of new watchdog agencies were created and consolidated to streamline the federal regulatory process while several non-bank financial institutions were monitored by the Federal Reserve itself.
How did Dodd-Frank affect the forex industry?
The legislation is widely credited by many for ensuring a safer environment for trading and investing, particularly on the consumer side of things. After all, a key part of the regulation known as the Volker Rule prohibits banks and financial institutions from allocating a huge part of client funds in risky and speculative holdings.
However, Dodd-Frank restrictions on the financial trading industry have led several brokers to go offshore to prevent paying hefty compliance fees or risk getting slapped with huge fines. This has led the U.S. forex industry to lose market share to other regions like Europe and Asia which have lighter regulations.Based on the numbers from research firm Aite Group, the U.S. share of the $300 billion global daily forex volume was cut from 6% in 2009 to 3% in 2016. There are only three U.S.-based brokers offering forex trading to retail customers compared to 40 companies in 2006 before the financial crisis and Dodd-Frank.
According to estimates FXCM CEO Drew Niv shared during the latest Finance Magnates London Summit, these U.S. forex brokers are spending $10 million per year in additional regulatory compliance costs related to Dodd-Frank requirements.
Critics of Dodd-Frank also say that the legislation winds up locking in too much capital in reserve requirements, thereby limiting liquidity and profit-making opportunities in several markets.
What will the GOP replace it with?
It would be unreasonable to eliminate financial industry regulation in its entirety, so Republicans have come up with a plan to replace Dodd-Frank.
The Financial Choice Act, which has already passed the House of Representatives in a 233-186 vote while the rest of the world was fixated on the Russian intelligence leak probe, is touted to reduce restrictions on the banking industry in order to create more jobs and boost growth.
The bill gives Congress the authority to change the budget of the Consumer Financial Protection Bureau or scrap its funding entirely. It also promises to give the U.S. President more power (yikes!) to say “You’re fired!” to the heads of regulatory agencies like the Consumer Financial Protection Bureau and the Federal Housing Finance Agency at any time and for any reason.
A number of Democrats have warned that this could undo the progress and safety checks in the financial industry over the past few years. According to House minority whip Stephen Hoyer, repealing Dodd-Frank could mean a repeat of history and put Americans at risk of losing millions of dollars.
Senate has yet to vote on the Financial Choice Act and would likely propose amendments or companion measures to the bill.
On a more upbeat note, several Republicans and Democrats in Senate have been working hand-in-hand to craft a bipartisan approach in Wall Street regulation. The committee seems hopeful that they can come up with something that reduces government micro-management and returns to the basic principles of safety and sound market-driven factors.
However, GOP senators still need to sway at least eight Democrats to pass the bill with at least 60 votes.
Another scenario is to pass regulatory relief through reconciliation, which only requires a 50-vote majority in Senate. This would mean fewer and limited changes to Dodd-Frank rather than a larger overhaul. Keep in mind, though, that any regulatory changes would still need the approval of the heads of the Fed, the FDIC and the Comptroller of the Currency.
How will this affect the U.S. forex industry?
Brokers that have moved headquarters and operations offshore to escape Dodd-Frank restrictions are watching this potential repeal closely, likely waiting for a chance to re-enter the U.S. market.
For instance, Russian currency broker Alpari which moved operations out of the U.S. in 2011 is on the lookout for looser restrictions when it comes to forex reporting.
Smaller forex firms could pop up as well, especially if the CFTC requirement to maintain minimum capital of at least $20 million plus 5% of the amount by which liabilities to retail forex customers exceed $10 million is lifted.
Of course the opening or reentry of more forex firms could mean a bigger burden for regulatory agencies and cutting their budget or reducing their scope in patrolling the industry could mean a recipe for disaster.
In any case, U.S. markets seem to be cheering these potential reforms that promise to make Wall Street great again. Only time will tell if it’s a great success or a great mess.