What the Dodd-Frank Act means for lawyers in China

CML Recruitment
Ben Cooper
Head of in-house legal and compliance search Asia-Pacific
[email protected]

The Global Financial Crisis (GFC) of 2008 was the worst financial crisis since the Great Depression. Globally, millions of jobs were lost, housing prices dropped and personal savings accounts were wiped out, leaving the world shaken and determined to avoid it happening again.

In response to the GFC, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed by President Obama on July 21 2010. This Act, which includes more specified and smaller rules within its scope, provides sweeping changes to how the financial sector is regulated and monitored.

Although the Act seems to apply mostly to the US, with the aim being to grow the economy and create jobs there, a more specific regulation under this Act that reaches further afield is the OTC Derivatives Clearing regulation. All the G20 leaders agreed this, in an effort to increase the safety of the over-the-counter (OTC) derivatives market and to regulate financial markets. This legislation calls for all OTC derivatives to be traded electronically and intermediated by a central clearinghouse. Although the Asia-Pacific region accounts for about 8% of the global OTC derivatives, six jurisdictions have already committed to building clearinghouses.

The need for manpower

Regarding the job market, these regulations imply that manpower is needed to meet the targets imposed by each regulation. Financial institutions will need to beef up their operational control, compliance and risk management divisions to ensure the requirements of the regulators are met. Here at CML, we have been approached to look for temporary positions for OTC clearing for time-specific projects. However, is it the case that only temporary roles will be required to meet each target or will this lead to more permanent positions?

According to James Kruger, global head of legal at Macquarie Securities Group: “Macquarie has many lawyers engaged in derivatives reform initiatives that are being rolled out – to various extents and in accordance with various timelines – by the G20 countries. The projects are bigger than lawyers (project management, operations, compliance), but they must have lawyers (regulatory, documentation, transactional and structuring) and lawyers based in Asia.” He sees a couple of reasons for this: “Obviously, there are many Asian jurisdictions within the G20, but even when one looks at Dodd Frank, one needs to have (a) regulatory lawyers for registration implications of entities located here for swap dealing, as well as introducing brokers involved in the solicitation of swap deals (and there are quite a few nuanced issues around that); (b) documentation lawyers to deal with protocols, questionnaires, reps and warranties, special entities, enhanced KYC, confidentiality issues, segregated margin (and that's before we talk about cleared contracts); (c) structuring lawyers to identify opportunities or ways to consolidate current business lines. We're all going to be busy for a while.”

Aside from temporary positions, these regulations are creating extra work. At the same time, the decrease in transactional work means lawyers who are already in transactional legal teams are being given additional projects and responsibilities. This is instead of institutions hiring additional lawyers to implement the changes.

Although the teams are busy implementing the new regulations, most banks are not allowing new head count due to budgetary constraints. Head count is also not being approved due to the continued short-term view of bankers who are concerned about their personal compensation, a culture that the Act sought to address. In addition, by the time that Act is effective and any sanctions imposed, those in charge of profit and loss are unlikely to be in the same position.

On the private practice side, the Act is proving lucrative from an advisory perspective and will lead to an increase in work for litigators defending banks from infringements of clearing provisions, proprietary trading, as well as cases arising from the whistle-blowing provisions. Becoming an expert in the Act may be advisable for lawyers seeking a long-term profitable practice.

The Volcker Rule

Another cornerstone of the Act that has an effect on banks in Asia is the Volcker Rule. The purpose of this Rule is to prohibit depository banks from proprietary trading and limit how much these institutions are able to invest in risky trading operations like hedge funds. This has caused concerns for banks, as proprietary trading has been a profitable activity. Certain trades like risk-mitigating hedges are allowed and it seems possible for banks to create loopholes in order to make big bets under the guise of hedging.

Whether these regulations have eased the situation is undecided. From the outside, there appears to be two possible outcomes: either the financial regulations are not strong enough and banks will find a way around them or the trade in global markets will decrease and banks will struggle to make any profit, leading to more job cuts. Although many argue that the chances of another financial meltdown occurring imminently are slim, little has changed. Moreover, the legislation has mostly served to preserve the status quo, rather than make any significant steps to improving the situation. It will be interesting to see what the overall outcome will be.