Dodd-Frank Law: general provisions, requirements and features

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:43

In 2011, the United States financial system experienced the biggest change since the Great Depression. The Dodd-Frank Wall Street Reform and Consumer Protection Act went into effect. The signing of this act by Barack Obama is intended to increase the transparency of the financial system. This time the state put the interests of taxpayers in the center of the corner. Ordinary people should not suffer because of the dishonest actions and short-sighted strategies of the top management of various companies.

Goals

The law strengthens supervision of large financial institutions whose failure is tantamount to the collapse of the entire system, as happened during the recent global financial crisis, which began with problems in one of the world's leading investment banks, Lehman Brothers.

New organs

The purpose of the functioning of any commercial structureis to make a profit. And very often this desire is incompatible with work for the benefit of society and each of its individual members. Therefore, the Dodd-Frank Act provides for the creation of a number of new institutions whose purpose is to control the activities of systemically important financial institutions, reduce risks and protect taxpayers. Changes also affected existing bodies. They affected, in particular, the Securities Commission, the Federal Reserve and the Investor Protection Corporation. A body such as the Financial Stability Oversight Board was also created. Its main task is to identify existing risks, find ways to reduce them and implement appropriate measures.

Creation Tasks

The first of the 15 sections of the Law is entirely devoted to maintaining financial stability. It regulates the creation of two new bodies. These are the Financial Research Authority and the Stability Oversight Board. Each of them has its own functions, but they work for the general idea of improving the stability of the system. Their activities are controlled by the Ministry of Finance. The Council analyzes the information received from the affiliated agencies and, on its basis, makes a risk assessment. Its chairman can now, with the consent of a supermajority of members, transfer to the control of the Fed those financial companies that are suspected of being a risk to the stability of the national economy. The Council also controls all normative acts that relate to this area, and regularly delivers a report atmeeting of the Congress. The task of the Department is to coordinate the activities of the bodies in the field of data collection and research aimed at developing monitoring and risk assessment tools. Within the framework of this body, it is planned to create two centers: data processing and scientific and analytical.

OTC

If you read the Dodd-Frank law in Russian, it becomes clear that now the operations of US residents in the Forex market are illegal. This act generally provides for a complete rejection of over-the-counter trading. Moreover, both currency and precious metals. This prohibition also applies to the activities of companies that enable their US resident clients to trade with each other on the Forex market. Previously, these transactions were not registered on the stock exchange in any way and completely took place within the companies. Such changes should lead to a reduction in fraud, increase the transparency of the financial system and guarantee the protection of the rights of investors.

Liquidation procedure

The 2008 global financial crisis was largely associated not only with the provision of loans to unreliable borrowers, but also with the panic that arose after the bankruptcy of such a large investment concern as Lehman Brothers. Therefore, the Volcker rule and the Dodd-Frank law streamline the activities of backbone institutions and their termination. Consumer lending is separated from investment banking,private equity and own hedge funds of financial institutions. The Dodd-Frank Act and the Volcker Rule are linked to the need to protect ordinary American taxpayers. The first introduces new rules for the liquidation of systemically important companies, and the second limits the ability of banks to invest their own depositors' funds in hedge funds. Now they can only own 3% of the capital of the latter. The Dodd-Frank Act provides for a special regime for the liquidation of large financial institutions, the bankruptcy of which can lead to the collapse of the entire system. The entire procedure must now be funded by the United States government. It is assumed that in this way it will be possible to avoid panic in the market and the sale of the bank's assets at a lower cost. After the end of the liquidation, the owners compensate for the costs. If, shortly before declaring bankruptcy, the latter try to transfer part of the property or funds to third parties, now there is a process for returning such valuables.

Introduction of pen alties from management

The law also provides for the personal liability of top managers whose actions led to the collapse of the company. Of course, they are removed from management, and sometimes they can be banned from holding similar positions in other financial institutions. According to the Dodd-Frank law, they can even be recovered from the damage caused to the company.

Structure

The Dodd-Frank law consists of 15 sections. The first one is dedicated to ensuring financial stability. It providescreation of two new bodies. The second section describes the liquidation procedure. The third is the transfer of authority. It involves the elimination of existing bodies to reduce duplication of responsibilities for regulating the area in question. The fourth section is devoted to the control over the activities of financial advisers. Since it was previously regulated only at the regional level, this gave room for fraudulent reporting and other abuses. The fifth section involves monitoring all aspects of insurance. The Dodd-Frank Financial Reform Act also calls for improved regulation. Its sixth section is also called the Volcker Rule. The seventh section involves the expansion of regulation of the market for credit derivatives and credit default swaps. Ultimately, their trading should become completely exchange-based. The eighth involves the oversight of clearing and settlement. The Fed should develop uniform risk management standards for systemically important financial institutions. This will increase the stability of the economy as a whole. The Dodd-Frank Consumer Protection Act provides for improved oversight of the securities market. This is the subject of the ninth section. The tenth is devoted to the creation of a consumer protection bureau within the Fed. It should regulate the provision of financial products by the latter. The eleventh section introduces new powers for the Fed related to the orderly liquidation of large companies. The twelfth involves simplifying the access of citizens with an average or even low income to the financial system. Section 13 amends the 2008 Economic Stabilization Act. Fourteenthreforms mortgage loans. The fifteenth section is the other provisions.