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Dodd-Frank to Drive Massive Systems Changes

A worldwide wave ofregulatory change-exemplified by the Dodd-Frank Wall Street Reform Act in the United States-will bring "massive changes in terms of technology" in the securities industry.

"Virtually every new regulation brought about by the Dodd-Frank Act is going to require new technology solutions," said Tim Ryan, president and chief executive of the Securities Industry and Financial Markets Association, addressing the 2011 Financial Services Technology Leaders Forum and Expo.

The act "touches every corner of our industry," Ryan said, through the 243 rulemakings that it has spawned. Of which, only 21 have been completed.

Randy Snook, executive vices president of SIFMA, added: "Preparing for each of these is a daunting task. On the one hand, we need innovations that comply with regulations while providing customers with choice. On the other hand, we need to shore up the foundation of our financial system to make it more resilient. We need the right balance of responsible innovation coupled with responsible regulation."

Two key initiatives that SIFMA will work on are creating a worldwide "single system" for identifying counterparties in trading; and, setting up new markets in what have been over-the-counter derivatives securities. The single system of designating who a counterparty is in a transaction is known as Legal Entity Identifier, or LEI.

This new system will create a single ID to be used for comprehensive regulatory reporting, Snook said. LEIs also have the potential to make reconciliation between systems easier and offer ways to improve efficiencies in processing and settlement as well as corporate actions management.

"Bottom line, this is the tool that is going to let systemic regulators do their job and, over time, allow firms to manage data more efficiently," Snook said.

With over-the-counter derivatives such as interest-rate and credit-default swaps, "we are experiencing a paradigm shift to a more complex regulatory structure that will require massive investments on behalf of each of your firms," he said.

There will be mandated centralized clearing of OTC derivatives, plus post- trade price reporting that "will provide increased transparency over a range of products used day-in and day-out," he said.

After that will come creation of what Dodd-Frank designated as "swap execution facilities."

Snook said rules from the Securities and Exchange Commission and the Commodity Futures Trading Commission could come as early as this month.

"We're working with regulators to implement these new rules while ensuring these valuable products remain available and cost-efficient to end-users," Snook said.

Stock markets are also experiencing changes that are spawning system changes, he said. Short sale price tests, single stock circuit breakers, and a limit-up/limit-down mechanism that is expected to be coming out of the SEC "are driving updates to trading systems," he said.

"There will be opportunities that this change and technology will create," said Richard J. Daly, CEO of Broadridge Financial Solutions. "Technology will be the great leveler of the playing field."