Lesson 5: Key Regulatory Frameworks: Basel, Dodd-Frank, and MiFID

The Cornerstones of Modern Regulation

The Basel Accords are the primary international regulatory framework for banks .

Basel I: Introduced the concept of risk-weighted assets and a minimum 8% capital requirement.
Basel II: Expanded to include three pillars (Minimum Capital, Supervisory Review, Market Discipline).
Basel III: Developed after the 2008 financial crisis, tightened capital and liquidity requirements, and introduced the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) to improve banks’ ability to weather financial stress .
Basel IV (Implementation): Represents ongoing updates to Basel III standards, particularly around the calculation of risk-weighted assets .

The Dodd-Frank Wall Street Reform and Consumer Protection Act was the US response to the 2008 financial crisis . Key provisions include:

Financial Stability Oversight Council (FSOC): To identify systemic risks.
Volcker Rule: Restricts banks from proprietary trading and investing in hedge funds.
Consumer Financial Protection Bureau (CFPB) : Created to oversee consumer financial products.

The Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR) are the cornerstone of European financial market regulation .

Introduced more stringent transparency requirements for trading venues and investment firms.
Strengthened investor protection rules.
Expanded scope to include new financial products (e.g., commodity derivatives).
Forced unbundling of research and execution costs for asset managers.

Candidates should also be familiar with:

EMIR (European Market Infrastructure Regulation): Regulates OTC derivatives, central counterparties (CCPs), and trade repositories .
CRR (Capital Requirements Regulation): Implements Basel III standards in Europe .
SFTR (Securities Financing Transactions Regulation): Introduces transparency and reporting requirements for securities financing transactions .