The Impact of Dodd-Frank on Investors

Wealth: Will the Dodd-Frank Wall Street Reform and Consumer Protection Act change how Northern Trust is able to serve clients and their families, including their businesses, trusts and foundations?
Jean Sheridan: Our business model will not change as a result of Dodd-Frank. We believe, overall, the Act will have less impact on custodian and trust banks like Northern Trust, given the nature of our business and the services we offer our clients.

This does not mean we underestimate the impact the Act may have on our business and our clients. We are focused on several rules that will affect Northern Trust, as well as our clients. However, regulators have not yet issued final – and in some cases proposed – regulations on several aspects of the Act. For example, proposed regulations for the Volcker Rule were released only in mid-October. While it is not possible to evaluate the full impact of the Act, our commitment, as always, is to help clients manage and preserve their wealth through changing environments.

Wealth: Will the new consumer protection rules change the way Northern Trust does business?
Sheridan: The aspects of Dodd-Frank that will provide greater protection to our clients, and the financial services industry as a whole are consistent with our conservative business model and risk approach. We expect the most significant change will come as a result of the creation of the Bureau of Consumer Financial Protection, which impacts lending and deposit banking products, and will result in increased data and reporting requirements for financial institutions including Northern Trust. We do not think this will have a major impact on how we manage our business.

Wealth: Do the changes make Northern Trust a more secure, stable institution?
Sheridan: In addition to increased reporting requirements and compliance with consumer protection rules, there will be increased capital and prudential requirements. Northern Trust already operates at very high levels of capital and continues to be a high-performing organization by a variety of measures, including our credit quality, growth in client assets, stable and solid credit ratings, and highly liquid balance sheet. We consistently rank as one of the strongest financial institutions in the United States in terms of our financial strength and stability.

Wealth: Under the new rules, will clients be required to clear derivatives or will they be exempt?
Sheridan: Regulations are not yet final. However, the mandatory clearing of swaps will largely depend on two key factors: (1) how an entity is classified; and (2) the types of swaps traded. Under the proposed rules, if you are a swap dealer or major swap participant, you will need to register and will be subject to comprehensive regulations. Based on proposed rules, it appears that many corporations and pension funds may receive end-user exemption from trading centrally cleared swaps. It also appears likely that vanilla swaps will make up the majority of products traded on central counterparties, while exotic or bespoke swaps or options will continue to be traded over the counter.

Wealth: What kinds of margins will clients be able to post at the clearinghouse?
Sheridan: According to the proposed rules, investors who clear swaps will be required to post initial and variation margins through their clearing member. The list of acceptable collateral will vary from one exchange to another, but it appears that this will generally be restricted to cash and highly liquid, stable instruments, such as government bonds.

Wealth: Will there be additional costs to trading swaps on the exchange?
Sheridan: Investors will see both direct and indirect costs associated with trading cleared swaps. With the addition of two new parties to the agreement, the direct costs will be evident when trading a cleared swap. Both the exchange and clearing member will include charges in processing a transaction. For example, indirect charge swap participants will need to negotiate new execution and clearing agreements and choose the clearinghouses where they prefer to clear their swaps. In addition, clearing members may charge excess margins, which would add to the total cost of carrying a swap.

Wealth: Has the pace of the rulemaking process affected Northern Trust’s ability to assess what will eventually become law?
Sheridan: The pace of the rulemaking process has been challenging for financial institutions, including Northern Trust. In some cases, rapid rulemaking requirements allow little time for planning and implementation; in other situations, slow rulemaking limits the kind of progress we can make. Central to the challenges is that several parts of the law have an effective date 12 to 18 months from the date of enactment, but in many cases the final rules are yet to be issued by the regulatory agencies.

However, we anticipate that during the first quarter of 2012 we will see many important proposed and final rules released by regulators. Northern Trust has a Global Financial Regulatory Reform Management team that actively monitors and responds to these new rules and is engaged in the rulemaking process and industry developments.

Wealth: Does the Act introduce any new complexities for clients? How can Northern Trust help manage these?
Sheridan: Dodd-Frank is the most comprehensive financial reform legislation in the United States since the 1930s. It is complex. However, as a wealth manager, our objective is to anticipate the needs of our clients ahead of these changes.

We actively participate in the rulemaking process – both individually and through industry groups through comment letters and meetings with regulators, U.S. Congress members and the U.S. Treasury – to understand the intent of proposed rules, prepare business requirements and anticipate client needs. We participate in industry forums and working groups to better understand the trends and the impact to our clients. Depending on their needs and our role, we have taken a consultative approach with our clients in some cases; in other instances, we have taken a collaborative approach. Our intention is to stay ahead of regulatory change and help our clients do the same.