05:47 PM
John Avery, SunGard Global Services
John Avery, SunGard Global Services

Coping with the Unintended Consequences of Dodd-Frank

Financial firms are learning to cope with the effects of Dodd-Frank by turning their focus to IT and operations, vendor "lift outs: and variable headcount, writes SunGard' Global Service's John Avery.

Typically following any broad, sweeping legislation, and particularly with legislation as far-reaching as Dodd-Frank, come the cries of unintended consequences. These are the negative impacts on markets and operations, unforeseen by the authors, supporters and even opponents of the original legislation.

Dodd-Frank, while based on strong fundamental principles of market oversight, transparency, fiduciary governance and compensation reform, is not exempt from such unintended consequences, although you could say these consequences are affecting us much earlier than originally anticipated.

These consequences are affecting the way firms run their business and plan their budgets and investments. Historically, firms have three major budget groupings each year. "Run the Bank" (RTB) budgets cover expenditures to keep the lights on in operations and technology. Discretionary "Change the Bank" (DCTB) budgets are used on initiatives to generate new revenue or reduce expenses. Mandatory "Change the Bank" (MCTB) budgets cover the costs of regulatory compliance and other changes that must be implemented for the firm to remain compliant in the markets where it transacts.

With these three budget areas in mind, we've observed five consequences already making their mark, all tied to Dodd-Frank and its remediation cost:

1. DCTB budgets are razor thin and primarily focused on expense reduction initiatives. This is stifling innovation, since the resources typically invested in competitive differentiation on the revenue or expense lines are now being consumed by mandatory regulatory remediation.

2. Remaining DCTB spend is being focused offshore. Whatever DCTB budget remains for revenue growth is being allocated to building up lower cost capacity outside the traditional New York and London financial centers.

3. Pressure to reduce RTB budgets is never-ending. With declining revenues and little or no innovation to drive new revenue, the natural focus is on expense management, but that's hard to do with limited or no DCTB budget.

4. Significant multi-year savings programs are already in place. Nearly all the major global banks and dealers have expense reduction programs with target savings of $1 billion or more over the next three years.

5. There is a race to the bottom in OTC derivatives. As the opportunity for profitability on bespoke, un-cleared OTC transactions wanes, nearly all incumbent OTC dealers and major Futures Commission Merchants (FCMs) are also undergoing significant transformation programs to optimize and reduce the footprint of their operations and IT support infrastructure so they can compete on volume and transaction cost.

Along with these consequences, we’ve also observed five ways that firms are attempting to cope by turning their focus to operations and IT:

1. Fixed operations and IT costs are being converted into variable costs. The established trend of outsourcing continues, and in these days of declining revenues it couldn't be more important. Capital markets participants are focusing more on outsourcing core processes and no longer just going after the low-hanging fruit on the fringes.

2. Fixed cost, full-time equivalent (FTE) headcount is being reduced through vendor "lift-outs." This is a variation on the outsourcing theme, allowing vendors to scale expert staff across clients, and giving the customer immediate balance sheet relief and opportunity for longer term savings. As pressure continues to mount on revenues, we expect to see more and more new and interesting vendor relationships emerge on Wall Street.

3. “Get more from your existing technology” is becoming a mantra. With little or no DCTB budget, firms are looking at how they can get more out of existing vendor and proprietary systems, particularly through consolidation and elimination of duplicate (or worse) functionality and technology.

4. “Get more from your existing tools and frameworks” is another mantra. Firms are trying to get more leverage from existing features in their IT infrastructure, taking better advantage of what they are already paying for.

5. Base salaries and bonuses will continue to trend downward. The glory days of Wall Street compensation may be behind us, and if revenues continue to decline, this could be more than just a current trend. Hopefully, there will be limited negative impact on talent and career opportunities over the long term and that the first four coping strategies will open new doors for career growth in the coming years.

In summary, unintended consequences of Dodd-Frank have quickly created long-lasting impacts on the capital markets industry, but thankfully firms and vendors are evolving to cope with these impacts in some new and some not-so-new ways.

-John Avery is partner, SunGard Global Services

Comment  | 
Print  | 
More Insights
More Commentary
A Wild Ride Comes to an End
Covering the financial services technology space for the past 15 years has been a thrilling ride with many ups as downs.
The End of an Era: Farewell to an Icon
After more than two decades of writing for Wall Street & Technology, I am leaving the media brand. It's time to reflect on our mutual history and the road ahead.
Beyond Bitcoin: Why Counterparty Has Won Support From Overstock's Chairman
The combined excitement over the currency and the Blockchain has kept the market capitalization above $4 billion for more than a year. This has attracted both imitators and innovators.
Asset Managers Set Sights on Defragmenting Back-Office Data
Defragmenting back-office data and technology will be a top focus for asset managers in 2015.
4 Mobile Security Predictions for 2015
As we look ahead, mobility is the perfect breeding ground for attacks in 2015.
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - Elite 8, October 2014
The in-depth profiles of this year's Elite 8 honorees focus on leadership, talent recruitment, big data, analytics, mobile, and more.
Stressed Out by Compliance, Reputational Damage & Fines?
Stressed Out by Compliance, Reputational Damage & Fines?
Financial services executives are living in a "regulatory pressure cooker." Here's how executives are preparing for the new compliance requirements.