Impact of the Dodd-Frank Act on OTC Derivatives

A new report from Aite Group addresses the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (FinReg) on over-the-counter (OTC) derivatives, and discusses outstanding issues associated with its implementation.

Key among the issues FinReg seeks to address is systemic financial risk in the trading, clearing, and reporting of OTC swap transactions, but a number of issues remain. Lack of clarity over definitions and terms, jurisdictional confusion resulting from oversight divided between the US Securities and Exchange Commission (SEC) and US Commodity Futures Trading Commission (CFTC), connectivity issues for trading firms dealing with various types of swaps, and probable increases in trading costs and necessary IT investments are but a few of the issues with which the OTC derivatives industry will have to contend surrounding the implementation of FinReg.

“With respect to the trading, clearing, and reporting of OTC derivatives, uncertainty reigns where FinReg treads,” said John Jay, senior analyst with Aite Group and co-author of the report. “Despite the legislation’s pursuit of minimising systemic risk through increased transparency requirements, market structure, legal, and operational issues are no more clear today than when the Dodd-Frank Act passed in July 2010.”

“At this stage, the best that can be said about the Dodd-Frank Act is that it will have a far-reaching and substantial impact on the OTC derivatives marketplace,” said Paul Zubulake, senior analyst with Aite Group and co-author of the report. “The sole saving grace is that market participants expect regulators to allow implementation of rules governing the trading, clearing, and reporting of OTC derivatives to occur over time.”

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