by Sean O’Sullivan, Director,
Financial Services
The Senate recently passed a bill that would overhaul U.S. financial regulations at a level not seen since the 1930’s. The legislation proposes to close holes in regulation and curtail some trading practices that many believe led to the 2008 crisis in the financial markets. The Senate bill differs from the House bill in that the Senate eliminated the $50 billion fund that firms would have been required to pay into for use as a bailout for troubled financial firms. Proponents of this bill claim that this legislation will enable the financial system to avoid systemic collapse, which they claim was avoided only with government-provided TARP funds to prop up weaker firms. Opponents state that the bill does not address Fannie Mae and Freddie Mac; not only the largest recipients of tax payer bailouts, but seen by many as the root of the problem in the 2008 collapse.
Some major components of the bill, and its potential implications for the outsourcing market, are as follows:
1. New Regulatory Authority
Fed regulators would be given new authority to seize and break up large financial firms – previously referred to as “Too big to fail” – that could cause systemic risk to the financial markets and the overall economy. The WSJ has noted that the ratings of firms deemed “Too big to fail” could be downgraded due to this provision and therefore would incur higher borrowing costs. These higher costs would put pressure on both margins and profits.
Outsourcing Market Implications:
• “Too big to fail” firms will need to reduce expenses to cover the shortfall in profit margins, which may be an opportunity for additional outsourcing.
• Is a government takeover covered in outsourcing agreements or is this a force majeure?
As service providers see more risk in large firms, will they use price increases as a mechanism to mitigate these risks?
2. Derivatives
The bill would require most derivatives trading to be executed on a public exchange as opposed to the current market whereby derivatives trades are done privately between banks and customers. Another provision in the bill would require large commercial banks with access to a Federal discount window to spin off its derivatives trading businesses.
Outsourcing Market Implications:
• Would captives need to be split up to separate derivatives trading operations?
• Would existing outsourcing arrangements need to be terminated?
• What would the mechanism be to separate the trading business out from a shared service center?
• Will this create an opportunity for a specialized service provider to purchase and leverage a “derivatives” captive?
3. Financial Stability Council
A new board established would recommend to the Federal Reserve stricter capital, leverage, and other regulations for large firms deemed a threat to the financial system.
Outsourcing Market Implications:
An additional level of reporting and compliance may be required to satisfy these new regulatory requirements, leading to an increased demand for outsourced systems development projects or even an opportunity for BPO /KPO service providers.
4. Hedge Funds
Hedge funds with more than $100 million under management will be required to register with the SEC as investment advisors and disclose information about their trading and portfolios.
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Outsourcing Market Implications:
• Hedge funds will face additional scrutiny from a regulatory, compliance, and reporting requirements standpoint that will provide an opportunity for service providers to bring best practices and solutions to the industry.
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