This presentation serves as study notes for the e-learning material titled: "South African Hedge funds and international developments" These notes focus on Dodd Frank and its Impact on the Hedge Fund Industry. http://www.hedgefund-sa.co.za/dodd-frank

1. Dodd Frank Act Summary
Study Notes

2. Brief Overview
• Dodd Frank Act:
– Its full name is the Dodd Frank Wall Street Reform
and Consumer Protection Act
– Reaction to the Housing Crisis in 2008
– Implemented in 2010
– It was created by Senator Christopher J. Dodd and
of Connecticut and US Representative Barney
Frank of Massachusetts

3. Brief Overview
• Dodd Frank Act:
– What Does it do?
• Dodd Frank places many new regulations on financial
institutions while attempting to keep accountable the
companies who fell during the crisis.
• Adds over 90 provisions that require SEC rulemaking,
and gives the SEC additional discretionary power.
– Not every rule that was involved with Dodd Frank
has been implemented yet, but many will be
initiated over time.

4. How does Dodd Frank affect
Consumers?
• Dodd Frank helped create the Consumer
Financial Protection Bureau (CFPB) as a
committee to help protect consumers.
– The committee’s duties are to make sure the
regulations are followed to protect consumers
– It will be run by an independent director who is
chosen by the president and voted upon by the
senate
– CFPB will be funded by the Federal Reserve

5. How does Dodd Frank affect
Consumers?
• Dodd Frank helped create the Consumer Financial
Protection Bureau (CFPB) as a committee to help
protect consumers.
– The CFPB will be allowed to create new rules for
consumer protection
– Banks and credit unions with more than $10 billion in
assets will be examined through proper regulations
– The committee will consolidate work which was
performed previously by several other departments.

6. How does Dodd Frank affect
Consumers?
• The Federal Reserve also has a new oversight
committee.
– Its goal is to end bailouts for too-big-to-fail companies
and eliminates bailouts for large corporations that
would require taxpayer money which could potentially
harm the economy
– It would create regulations to make it unattractive to
become too large of a company, and safeguards would
be set in the case that a large company decided to
make a decision which could endanger the status of
the economy

7. How does Dodd Frank affect
Consumers?
• Transparency and accountability for exotic
investment vehicles.
– Vehicles being referred to are
• Hedge funds
• Asset-backed securities
• Mortgage brokers
• OTC derivatives
• Payday lenders
– This could protect investors from potential harm of
investing in these riskier vehicles, but also impact
revenue for the institutions negatively

8. How does Dodd Frank affect
Consumers?
• Regulations on bookkeeping will be more
heavily enforce to reduce fraud, manipulation
of the system and conflicts of interest.

9. How does Dodd Frank affect Banks?
• Banking was a large factor in why Dodd Frank was
created.
• The Financial Stability Oversight Council
– Was created for assisting with the breaking up of too-
big-to-fail companies.
– Made up of the head chair who is the Treasury
Secretary, and nine others from departments
consisting of:
• SEC
• CFTC
• OCC

10. How does Dodd Frank affect Banks?
• Banking was a large factor in why Dodd Frank
was created.
• The Financial Stability Oversight Council
– Made up of the head chair who is the Treasury
Secretary, and nine others from departments
consisting of:
• FHFA
• NCUA
• FDIC
• CFPB

11. How does Dodd Frank affect Banks?
• Banking was a large factor in why Dodd Frank was
created.
• The Financial Stability Oversight Council
– Non-bank entities that may become too large can be
taken control of by the federal reserve if there is risk
of the entity endangering the financial system
• All banks are required to have set an emergency
shut down plan in the event or threat of
bankruptcy

12. Volcker Rule
• What is the Volcker Rule?
– Volcker Rule was created to prohibit banks from
using riskier investment vehicles
– Was originally planned to be initiated in July of
2012, but has been postponed for disagreements
in constructing the rule for the time being.
– Created by Paul Volcker
– Would require banks from removing investments
in private equity, hedge funds, and proprietary
trading.

13. Volcker Rule
• What is the Volcker Rule?
– Entities required to follow Volcker would be
• Credit Unions
• Traditional Banks
• Investment Banks
– Short term trading strategies would be prohibited
once Volcker Rule is passed
– Internal compliance departments would be
required to set up, and larger banks would need
to report to the appropriate agencies

14. Volcker Rule
• What is the Volcker Rule?
– Any investments put into a fund may not supply a
source of revenue over 3 percent overall
– Entities would be allowed to participate in holding
of foreign currencies to offset risk

15. Volcker Rule
• How would Volcker Rule be implemented?
– Banks would be required to exit out of their
positions in the specified investments once the
final draft has been published and a deadline is
set
– Since progress for Volcker Rule seems to have hit a
wall for the time being, banks may want to
continue with their previous investment strategies
that have been successful.

16. Volcker Rule
• Procrastination of the Bill
– Agencies involved with writing the bill are:
• The Federal Reserve
• The Office of the Comptroller
• SEC
• FDIC
• CFTC
– The way all of the separate agencies are intertwined is
not helpful in constructing the bill.
– Progress has not been seen yet, and Volcker Rule
should be ignored for the time being

17. Volcker Rule
There is an exception to the rule which allows
banks to hedge assets on speculative trading if
attempting to protect assets.
• Room for Improvement
– The exception is a large loophole for Volcker Rule
that could eliminate the rule all together.
– Some ask, “ how should an employee be
compensated if one wanted to reduce risk?”

18. Volcker Rule
• What others think
– Banks believe this will reduce incoming revenue
from investing activities
– Traders think this will bring smaller bonuses
– Some believe the loophole is too lenient and that
other requirements will need to be stricter as well.

19. Reforming the Federal Reserve
• New limits on emergency lending and
controlled by the Secretary of the Treasury
• GAO is now allowed to audit the Federal
Reserve on any issues involving:
– Emergency lending
– Open market transactions
– Discount window lending

20. Reforming the Federal Reserve
• Disclosures for lending transparency is now
required with information about the terms,
conditions, and amounts that are loaned.
• A Vice Chairman for Supervision has been
created as well, and will be selected by the
President.

21. How are Derivatives Affected?
• Dodd Frank’s goal for derivatives is to regulate
more risk derivatives, like credit default swaps.
• Riskier derivatives would now be regulated by
the SEC and CFTC.
• Clearing houses would be required to be
constructed to make derivatives more
transparent to the public for trading.

22. How are Derivatives Affected?
• What are Swaps?
– Swaps can be represented in the form of interest
rates, equity and commodity pricing, and foreign
exchange rates.
– Traded on the OTC market
– Dodd Frank decided to broadly regulate the OTC
market.

23. How are Derivatives Affected?
• Derivatives Registration
– Registration requirements depend upon the size of
the swap
– Quantitative and circumstantial analysis will be used
to determine the margin and capital requirements
– If certain criteria is met, participants involved are
required to register with the necessary US authorities.
– The SEC and CFTC has made some hedge funds, banks,
and energy companies exempt from derivative
registration.

24. How are Derivatives Affected?
• Clearing of Swaps
– The US and other G-20 countries are starting to
require clearing of swap transactions
• This will be performed through clearing houses
– Title VII of Dodd Frank details the requirements
demanded of derivative transactions
– Costs may be substantial in implementing the
changes
– The CFTC is able to add categories to swaps that
are transacted under the policies

25. How are Derivatives Affected?
• Clearing of Swaps
– The exception to the rule is called the “End User
Clearing Exception”
• The exception can be used for those using derivatives
as hedging or diversifying risk.
• Financial institutions, asset managers, and investment
vehicles are excluded from the exception
– Cleared swaps are subject to margin requirements
for collateral before they can pass through a
clearing house

26. How are Derivatives Affected?
• Clearing of Swaps
– Swaps under exemptions may also need to follow
margin requirements for future rule changes
– Final drafts of the clearing requirements for swaps
have not been written yet
– G-20 countries will work with Dodd Frank on the
requirements between countries, but there will
most likely be confusion about how everything
will be delegated.

27. How are Derivatives Affected?
• Exchanges and Electronic trading
– G-20 countries believe exchanges should be set up
for transparency of derivative transactions, and
that an electronic platform should be made as
well to act as a market surveillance system
– Trading strategies will vary by jurisdiction
– All cleared swaps will be traded through an
exchange as decided upon by the drafting of Dodd
Frank

28. How are Derivatives Affected?
• What is an SEF
– An SEF is a swap execution facility
– SEFs act as a market place for participants to
perform derivative transactions
– Developed by Dodd Frank, this will assist in
transparency and accountability.

29. How are Derivatives Affected?
• International Effects
– Because Dodd Frank and all of the other
regulations that developed out of the crash in
2008 are so different, there will most definitely be
confusion with implementation of each law
– Basel III increases collateral much higher than any
other laws that have been enacted
– With these margin requirements, higher grade
collateral will be in short supply

30. How are Derivatives Affected?
• International Effects
– Different options for collateral may be needed to shift
the demand for required assets
– The majority of all derivative trades would be required
to be pre-funded
– Operations would become very complex on an
international basis, and strategies would still be
supervised
– Someone would need to manage the assets that were
being held as collateral for the derivatives that are
being developed

31. How are Derivatives Affected?
• Reporting
– Swap transactions would need to be reported for
accountability and transparency, and then recorded in
a database
– Reporting would vary by jurisdiction, and integrating
with risk, compliance, and back office teams can
become very intricate
– There will be differences in reporting between cleared
and uncleared swap transactions
– For US citizens who participate in trading derivatives,
reporting will fall upon the predetermined entity

32. How is Mortgage Reform affected?
• New lender requirements are being put into
place to assure the borrower is qualified to
make the payments
• There is now more transparency in making
sure the borrower understands the conditions
of the information set before them
– This would require the lender to inform the
borrower if the interest rate is fixed or not, and
set a cap on the interest rate if it is not fixed.

33. How is Mortgage Reform affected?
• An Office of Housing Counseling has been
started within HUD to boost homeownership
and rental housing.

34. What will happen to Hedge Funds and
Private Equity
• Hedge funds and Private Equity funds are now
required to register with the SEC as an
investment advisor
• They will also be required to release
information on the contents of portfolios and
information on trading activities

35. How will Credit Rating Agencies be
affected?
• The Office of Credit Ratings is responsible for the
compliance of credit rating agencies
– Agencies are audited annually, and findings are
publicized
• The SEC is looking deeper into the methods of
how companies are rated, and how they use third
party information
• Other outside sources that are considered
credible through previous due diligence of
agencies and rating them can be used by the SEC

36. How will Credit Rating Agencies be
affected?
• A conflict of interest clause was also added
• Agencies are now liable if they have
knowledge that information is inaccurate and
do not respond immediately
• The SEC has authority to delist agencies that
are inaccurate with their ratings over time

37. Executive Compensation and
Corporate Control
• Executive compensation is now controlled by
the shareholders
– This is supposed to keep executives accountable
for their actions
• Compensation will be affected by deceptive
practices and changing of financial records to
appeal to shareholders
• Shareholders have the power to nominate
directors to shift goals to long term strategies

38. How is Insurance Affected?
• A Federal Insurance Office (FIO) was created and
is operating out of the federal government
– It is the first federal department that specializes in
insurance
• Its purpose is to gather information to help
supply lower and middle class individuals and
families with more affordable insurance
• The department also focuses assuring that small
businesses are treated fairly with fees

39. Credit Score Protection
• This allows consumers to now check their
credit score when negatively affected by a
missed opportunity or declined for a financial
transaction.

40. How is the SEC affected and are
Investors better protected?
• The SEC has authority to impose fiduciary duties upon
brokers who give investment advice
• Whistleblowers are being encouraged with large
incentives for uncovering corruption
• An external audit of the SEC will be performed
annually, and a GAO review will look at the
management in the SEC
• Dodd Frank created an Investment Advisory Committee
to supervise the SEC on regulatory practices.
– This will assist investors who have complaints about the
SEC and assure that the complaints are received

41. Reducing Risks Posed by Securities
• Dodd Frank wanted to reduce risk on
mortgage backed securities by requiring
issuers to hold a minimum of 5% credit risk
• Additional information about securities is now
required to allow investors to know what they
are partaking in

42. Oversight of Municipal Securities
Industry
• Municipal advisors are now obligated to
register with the SEC and follow the rules
mandated by MSRB
• Investors interests will be put first by having a
majority of independent members
• Municipal advisors must follow a fiduciary
duty

43. Congo Conflict Materials
• Mineral manufacturers in the Democratic
Republic of Congo who are registered with the
SEC are required to disclose materials
gathered and products manufactured
• The Act also requires links between
manufacturers and armed groups to be
disclosed for strategies of illicit minerals
traded

44. Congo Conflict Materials
• Deposit insurance is also discussed and raises
the limit to $250,000
• Projected loans by IMF to middle income
countries are curbed if the country’s debt is
greater than annual GDP

45. Conclusion
• There are mixed views about Dodd Frank
– Those who are against it believe there are too
many regulations that will negatively affect the
industry
– Those who are for it consider it to be an asset in
making investment entities more accountable
• If boundaries had not been tested previously,
Dodd Frank may never have come to be

46. Conclusion
• The Act has been enacted for over three years
now, but not all additional rules have been
implemented yet
• Outcomes of Dodd Frank will be evaluated to
be positive or negative in time