The Impact of Dodd-Frank on Derivatives

By West, M. Holland; Kerfoot, Matthew K. | Fordham Journal of Corporate & Financial Law, April 1, 2013 | Go to article overview

The Impact of Dodd-Frank on Derivatives


West, M. Holland, Kerfoot, Matthew K., Fordham Journal of Corporate & Financial Law


I. DODD-FRANK OVERVIEW

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), enacted on July 21, 2010, provides for the first time a comprehensive regulatory framework for the over-thecounter ("OTC") derivatives markets.' Fundamentally, Title VII aims to prevent future financial crises by mandating robust market level and transaction level transparency, while reducing structural leverage and systemic risk throughout the derivatives markets.2

While significant portions of Title VII remain subject to further rulemaking by the Securities and Exchange Commission ("SEC") and the Commodity Futures Trading Commission ("CFTC") (jointly, "Commissions"), Title VII codifies the global de-risking process that has been underway since the 2008-09 financial crisis, with a particular focus on:

* Reducing counterparty risk and enhancing transparency and price discovery by requiring clearing and exchange trading of eligible derivatives contracts;

* Deleveraging the OTC derivatives markets by imposing new regulatory capital and margin requirements on OTC swap dealers ("swap dealers") and certain large OTC swap participants ("major swap participants");

* Requiring swap dealers and major swap participants to register with the SEC and/or CFTC and to continuously disclose detailed information regarding their derivatives trading activities; and

* Prohibiting U.S. Federal guarantees and other Federal assistance from being provided to insured depository institutions involved in the swaps markets, subject to exceptions for certain types of swaps activities and affiliated swap dealers.

A. JURISDICTION

Dodd-Frank allocates jurisdiction over the OTC derivatives markets between the SEC for "security-based swaps" and certain participants in the security-based swaps markets, and the CFTC for all other "swaps" and certain participants in the swaps markets. The SEC, for example, will be the regulatory authority responsible for imposing new capital and margin requirements on security-based swaps, such as equity swaps, forwards, and options, while the CFTC will have analogous authority over all swaps other than security-based swaps, such as commodity swaps, forwards, and options.3

B. EFFECTIVE DATE

Significant portions of the Title VII legislation and mandated rulemaking were scheduled to take effect on July 16, 201 1 .4 The CFTC first granted temporary relief on July 14, 2011 to extend the deadline to December 31, 201 1.5 At its December 19, 2011 meeting, the CFTC further extended the effective date to July 16, 20 12.6

II. OTC DERIVATIVES SUBJECT TO DODD-FRANK

A. SWAPS

Dodd-Frank is intended to cover nearly all commonly traded OTC derivatives, including swaps and options on interest rates, currencies, commodities, securities, indices, and other tangible and intangible items and economic variables.

While a "forward" is not expressly included in the definition of a swap, a physically settled forward sale of a non-financial commodity or security is expressly excluded from the definition.7 This suggests that other forward contracts are intended to be included in the definition of a "swap."

B. SECURITY-BASED SWAPS

A security-based swap is essentially a transaction that would be categorized as a "swap" but which references a narrow-based security index or a single security or loan, or a swap that is based on the occurrence or non-occurrence of an event relating to a single issuer of a security or the issuers of the securities in a narrow-based index.8

C. FOREIGN EXCHANGE SWAPS AND FORWARDS

Foreign exchange ("FX") swaps and forwards are considered "swaps" and subject to regulation under Dodd-Frank, unless the Secretary of the Treasury determines that such transactions should not be regulated under Dodd-Frank.9 On April 29, 2011, the Secretary of the Treasury issued a Notice of Proposed Determination ("April 2011 Notice") providing that central clearing and exchange trading requirements would not apply to FX swaps and forwards. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Impact of Dodd-Frank on Derivatives
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.