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The Resource for the Global Finance Profession

Study: Regulation Remains a Top Risk Management Challenge

  • By AFP Research Staff
  • Published: 2013-02-19

Treasury and finance professionals report that regulatory risk is among the few factors that will have the greatest impact on their organization's earnings over the next three years, according to the 2013 AFP Risk Survey, sponsored by Oliver Wyman, to be released February 27.

Fully two-thirds of survey respondents report that regulatory risk is "difficult" or "very difficult" to forecast, making it the second most challenging risk to assess among 20 specific risks the survey asked about-behind only natural catastrophe risk. Even among treasury and financial professionals who indicate that their organization has robust risk assessment capabilities, nearly three-quarters report difficulty assessing and forecasting regulatory risk.

The prominence of regulatory risk for senior treasury and finance professionals today reflects the uncertainty surrounding financial regulatory reform that has been a reality since the 2008-9 financial crisis-uncertainty exacerbated by election politics and Congressional gridlock in Washington, DC. The Dodd-Frank Wall Street Reform and Consumer Protection Act introduced 2,000 pages of new regulations, some of which have yet to be implemented even as the effects of others are still being realized. 

Regulatory risk takes many forms. AFP members are familiar with the ongoing debate over additional reforms of money-market funds (MMFs). In an attempt to increase transparency in financial markets, regulators and legislators-principally the Treasury Department's Financial Stability Oversight Council (FSOC) and the Securities and Exchange Commission (SEC)-are weighing elimination of the stable net asset value of MMFs in favor of a floating net asset value (NAV). The proposed change could alter the classification of a money-market fund from a cash equivalent to short-term investment. Yet the new regulation could also affect treasurers' willingness to invest in MMFs and even preclude their ability to do so under some investment policies. The change could affect their portfolios, day-to-day operations and bottom line. Many corporate investors already are looking at alternative investment vehicles for their cash.

The significant resources required to implement financial regulation make forecasting regulatory change an imperative, yet the level of uncertainty-from discerning intentions through complying with new requirements-often leaves this risk very difficult to assess and manage proactively. But regulatory risk is one of many risk management challenges financial professionals must engage in their forecasting and planning. Read more about how financial professionals are managing risk in the 2013 AFP Risk Survey report.

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All rights reserved.

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