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Republicans' Win Could Be Regulators' Loss

While the Republican's seizure of the U.S. House of Representatives in the midterm elections likely won't impact the implementation of Dodd-Frank, it could mean reduced budgets for the capital markets regulators.

Wall Street firms are grappling with the strictest regulatory environment in more than 60 years. But will the midterm election results in the U.S. that saw the Republicans capture 60 seats to take control of the House of Representatives (the Democrats held on to the Senate despite losing seats) have any impact on regulators' plans?

Experts agree that while the Dodd-Frank Wall Street Reform Act is unlikely to be affected by the political changes, the new GOP majority is likely to seek some changes in other areas. "I don't think they will go back and undo what was passed in the Dodd-Frank bill," says Adam Sussman, director of research, Tabb Group. "Even if they did, it wouldn't be in derivatives reform -- that's not where Republicans had serious concern."

Paul Zubulake, senior analyst at Aite Group, agrees that the election results will not impact Dodd-Frank. "But what will happen with Fanny Mae and Freddie Mac?" he asks. "They were not included in Dodd-Frank, so that will be a different debate." Zubulake says the Republicans are likely to seek to put the private sector back in charge of the mortgage market.

In addition, "The election results will make it more likely that government entities will be unwound differently," he adds. "[The financial crisis] might still have happened anyway, but we will see more dramatic changes in how government entities are operated. And we will eventually see them dissolved."

Stephen Ornstein, a Washington, D.C.-based senior member of the capital markets practice at law firm SNR Denton, says he believes we will see some subtle changes regarding risk retention requirements. "Regulators have to come up with implementation specifics, but they have the authority to grant exemptions to the 5 percent risk-retention requirements," he notes. "Under Republican pressure, there could be some flexibility, so we could have easing of regulation, but not major amendments."

But while the legislation itself is unlikely to be impacted significantly by the election results, the pendulum may swing on regulators' budgets. "It's great that regulatory bodies have extra authority in the OTC area, but they are not self-funded," Aite's Zubulake points out. "The CFTC and the SEC will have to hire staff and spend money on technology. Will those budget dollars be as available [with Republicans controlling the House] as they were?"

If Republicans drive reduced budgets, Zubulake says, the regulators' ability to monitor the markets would be hurt just as they are taking on more responsibility. "For systemic risk regulation, if you don't have quality data management and technology that is compatible across different agencies, your ability to see what's going on in the market won't be as effective," he asserts.

Melanie Rodier has worked as a print and broadcast journalist for over 10 years, covering business and finance, general news, and film trade news. Prior to joining Wall Street & Technology in April 2007, Melanie lived in Paris, where she worked for the International Herald ... View Full Bio

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