Dodd-Frank: The Trump Remix
- The Trump administration appears to be serious about Dodd-Frank reform.
- The legislative mechanism for reform is likely to be The Financial CHOICE Act, expected to be reintroduced in the 115th Congress.
- Key aspects of that bill may require modification, or the potential addition of Glass-Steagall type provisions, to become politically palatable.
- No material modification of Dodd-Frank’s OTC derivatives provisions is expected, however the CFTC will likely loosen various implementing regulations.
Return of the Yield Curve
- The U.S. Federal Reserve has begun the process of normalizing interest rates following massive quantitative easing during the Great Recession.
- Achieving rate normalization is essential to bolster confidence in the economy and will reinstate a normal yield curve after a decade when it was flat.
- Currently on a path for three increases in 2017, the pace of rate hikes could accelerate if the effect of President Trump’s tax cuts and fiscal stimulus are felt before 2018.
- The Republican reform agenda contains multiple opportunities for Fed reform, which could alter or potentially derail the current path towards rate normalization.
Hedge Accounting Change Creates Bonanza for Commodities
- With the advent of organized commodities markets, active trading created price volatility, and ultimately the desire to manage and mitigate commodity price risks.
- Historical hedging practices combined with an unfriendly US accounting framework resulted in decades of suboptimal commodities hedging practices and outcomes.
- A recent US accounting standards change provides numerous improvements, some of which are particularly favorable to commodities hedging.
- We expect these accounting changes will cause an increase in commodities hedging, and a shift in hedging practices that will improve outcomes.