Regulatory Reform and its Implications for SWF Risk Management in the “New Era”

by Dr. Ron D’Vari

Dr. D’Vari discusses global risk management and the investment landscape for Sovereign Wealth Funds (SWFs) and other long-term institutional investors under the new and proposed laws and regulations being finalized in the U.S. and Europe. The major regulatory programs are Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), Solvency II, Basel III, and interaction of the Foreign Corrupt Practices Act (FCPA) and the False Claims Act (FCA) with Dodd-Frank. The European Securities and Markets Authority (ESMA) has also released for public comment the detailed rules that will accompany the European Market Infrastructure Regulation (EMIR) for reforming OTC derivatives trading in Europe.

He dissects the risk management challenges posed to sovereign investors by a changing regulatory landscape, especially as it relates to the trading of OTC derivatives. He navigates through the intricate shoals of proposed regulatory reforms linked to the trading of complex securities and calls for readiness even as the regulatory framework itself continues to emerge.

He first reviews key risk management considerations in the current market context, then focus specifically on the definition and role of safe assets (especially as they may satisfy the collateral base for derivative positions) and question whether traditional definitions must be reconsidered and reformulated. He next analyzes the impact of derivatives regulation on market infrastructure with a specific focus on collateral management, counter-party risk, and regulatory reporting. He ends with a brief reflection on the use of sovereign ratings under Dodd Frank.

Regulatory Reform and its Implications for SWF Risk Management in the “New Era”