Basel III and reform of the over-the-counter derivatives market continue to be hot topics in the financial-services industry. At this week’s Sibos 2011 conference, SmartBrief sat down with Brian Traquair, president of SunGard’s capital-markets business, to get his take on how the reform is taking shape.
What is your assessment of Basel III?
In terms of ratios, the hit on capital is going to be immense. It varies by product. For things such as structured products, most of the clients we talk to don’t see how they can keep doing that in the bank with the imposition of the capital that is required. The capital is going to be so tied up that if you combine that with the likely initial margin for the OTC derivatives clearing space, the combination of those two things is just a huge squeeze play. In order to try to deal with that, you are going to have to restructure what you decide to do and not do. Banks are going to have to decide whether they are going to be in all these paces or not. Some will make the call that they can generate enough capital, enough liquidity, and others no. Regulation is this sort of rolling thing. You open up the newspaper or go to a conference, and something else comes out and it always has two phases: the lawmaking and the rule making, and they’re struggling. Our clients reach out and ask what we think is going to happen. What most of our clients and we agree on is that we have to have systems with flexibility. We can’t actually predict what is going to happen.
Is it better to have a drawn-out implementation process that allows for a fine-tuned product that is ready to roll? Or a quicker implementation process that calls for additional products depending on how the market takes shape?
I think what we would like to see is regulators taking into account the impact one has on the other. You have Basel III, you have Dodd-Frank and you have all these other initiatives in other countries, and they create this tsunami effect in that you can’t figure out which way to run because there is just too much water coming at you. It is not so much that it is fast or slow, but could you have some sort of a schedule that takes into account the other things going on in the world? Most banks would prefer to take an evolutionary approach. We don’t want to spend more time waiting and debating and have a huge, big bang. We think that’s bad. Let’s do it in stages, and if you can articulate what each of the stages is and be clear about what has to happen, then that is OK.
From a bank’s perspective, you have to move from treating capital from just a regulatory perspective to actually something at which I am going to compete with my peers. I am going to have to be better than what Basel is requiring, or I’m simply not going to be able to survive. It’s no longer, “Did I pass the test? Am I over or under the ratio?” You have to do that because it is necessary. If you are out there derivatives trading or [proprietary] trading, you’re going to have to figure out the best possible use of capital or you just won’t be able to compete.
What are your overall thoughts on the Dodd-Frank Act mandating swaps-execution facilities?
Having more venues for execution and more transparency is good. It’s almost impossible to talk against that. When we look at the data repositories, we see a lot of interest in doing the data repositories but not much money to be made in actually performing that service for anybody. And that is probably, we think, a mistake because if you are going to have transparency and you are going to have data in various forms recorded, you’re going to have to make it something worth doing or it simply will be done poorly. On the execution facilities, it’s like a game of Whac-A-Mole. They multiply at such a rate that from a technology perspective, trying to keep up is almost impossible. … It’s all good, but it’s almost too much of a good thing.
What do you think of the notion that one or more of the swaps-execution facilities borne out of Dodd-Frank might one day become a systemically important financial institution, aka “too big to fail”?
As long as the ones that are successful have a plan for incremental investment, we’re OK. … Part of the goal here is that we should be able to send any of these trades to more than one forum and report them to more than one organization. Where it is only one, it is a potential problem. Life is about single points of failure. As a technology vendor, I dedicate half of my life trying to think about how to avoid those single points of failure. How to put in the appropriate backup. This is the same thing. If I am going to be executing these trades — and everyone was afraid of the over-the-counter market because of its issues, but it was a telephone-based market with really no single point of failure — and you go to these venues, you better make sure you have more than one place to go.
On a scale of 1 to 10 (1=poor; 10=excellent), how would you rate the OTC aspects of the Dodd-Frank Act?
I’d say it’s probably a 6. It’s definitely going to do good things, but, again, it is the law of unintended consequences. If you look at OTC derivatives and say, “If we do this, we’ll be able to have transparency.” Great. “And we have to put it through a clearing organization.” Great. But the law stopped at that point and just said, “And you have to put up margin.” And it just sort of went on to the next sentence not realizing that if you have to put up margin, it’s probably $1 trillion or $2 trillion. It’s so much money that you might as well declare a recession and get it over with. … You can’t blame a legislator for that. The legislation is pretty good and then you’ve got to have this tack on that as rule making is sensible.
Which regulator has done the best job of reacting to the crisis: U.S., U.K. or European?
Each jurisdiction has reacted in accordance with its level of pain. So, in the U.K.: Wham! Because it got sucker-punched. I don’t know what the legislation is in Iceland, but it must be extraordinary. In the U.S. versus Europe, the U.S. is much more of a concentration. The U.S. has one legislative framework. In Europe, you have the European framework, but you also have countries and lots of different stuff. I think the level of complexity in Europe is actually higher. In the U.S., it probably made more of a meal of it. It could have done half of this and still been fine, but there is nothing like a camera to influence a piece of legislation.