Speculation consumed the financial markets after the new US President Donald Trump signed an executive order calling for a review of Dodd-Frank on Friday. The stocks of major banks reacted by rising sharply in expectation of better times for them while Trump’s many critics in the media said that he is wilfully setting the stage for a new global economic crisis.
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We wanted to examine the possible ramifications of the move for the online financial trading industry. First however, it’s important to note that a President can’t just cancel a law by decree and it will therefore have to pass through many hands before an actual change is made.
Moreover, the Trump administration has indicated that they want to keep some parts of this lengthy legislation, which covers each of the many aspects of the finance industry. Considering that they have not clarified exactly which regulations will stay, no one knows at this stage what will remain of the law in the end, including the President himself.
During the campaign, Trump said that he wants to repeal Dodd-Frank due to the stifling burden it puts on small businesses in America that can’t get credit from banks with the same ease as big corporations.
His new administration is staffed with many top ex-Goldman Sachs executives which naturally see over-regulation on Wall Street as the main problem. The end product of this process can be expected to take both of these motivations into account, and create new streamlined regulations, rather than just repeal Dodd-Frank and leave the markets unregulated.
As for the online trading industry, American forex brokers could save up to $10 million a year in regulatory compliance costs alone if Dodd-Frank disappears without replacement. This is according to an estimation by FXCM CEO, Drew Niv, given during the latest Finance Magnates London Summit.
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The biggest impact however should be expected from the signal that reforming Dodd-Frank will send to regulators around the world. For years now the US has been the hardest jurisdiction for financial firms to operate in due to the heavy hand American authorities use to shape the markets. This helped competing financial centers strengthen their positions as global hubs, at the expanse of the US market, thanks to a more welcoming atmosphere.
If the US adopts a more relaxed regulation policy, other countries will also need to become more accommodating in order to prevent financial firms from moving there. This could reverse the global trend towards greater scrutiny, fines and restrictions that we have been seeing in recent years.
Enacted in 2010, Dodd-Frank, or “The Wall Street Reform and Consumer Protection Act” as it is officially called, was a direct response to the financial crisis of 2008 and to the perception that corrupt big banks and unscrupulous hedge funds were to blame.
Many firms, brokers and professionals that have had to comply with the numerous requirements of the law complained that it was an overreaction that simply complicated compliance and increased costs.
This was especially taxing on smaller operations that do not have the vast legal and lobbying resources that the big players do. During the latest US elections, Republicans echoed this sentiment, saying that Dodd-Frank hurt local financial institutions, community banks and small businesses.
However their opponents on the Left shot back by saying that they are really just looking to unshackle Wall Street from any regulations.