Dodd-Frank: Implications of the latest swap definition rule

Following the CFTC’s recent approval of a swap definition lawyers and the OTC derivatives industry are busy digesting the 600 page ruling. In effect, this kicks into motion an October 2012 timeline around the implications of two very significant previously defined rules for the regulation of OTC derivatives:

  1. Swaps defined by this rule must be cleared; and
  2. Swaps defined by this rule must be executed on SEFs.

It looks like the vast majority of swaps are included in the definition, so it’s likely that there will be some legal challenges.

With enforcement of the rules happening now it’s causing a major headache for those market participants who are behind the curve. In the  commodity markets in particular, there are real concerns amongst some firms about the impact of the emerging regulations on their businesses and the changes that need to be made in a short time frame.

Clarification is still needed in some areas –  whether there is scope for voice-dealing, for example – but soon we will see some crystallization of the market structure. The expectation is that there will be at least five SEFs per underlying asset class (IRS, Credit, FX, Commodities). SEFs will be either client-facing (such as Bloomberg, TradeWeb, Market Axess) or dealer-facing (BGC, ICAP and other IDBs looking set to launch SEFs).

Dealers will soon reveal what they have been doing to ramp up for the changes. There is an expectation that many major swaps dealers will reposition themselves as flow takers, providing best execution and a range of other services to the 7,000 or so buy-side participants who trade this $700 trillion notional swaps market (which dwarfs its $40-50 trillion global F&O equivalent).

Clearly there will be a great deal  of jostling for position in the next few months.  The ‘wait and see what emerges’ strategy no longer seems valid!

2 Responses to “Dodd-Frank: Implications of the latest swap definition rule”
  1. Anne Plested says:

    The digestion of the swaps ruling may prove all the more uncomfortable in Europe with EMIR rules still in their draft form. The ESMA Consultation Paper on Draft Technical Standards for the Regulation on OTC Derivatives, CCPs and Trade Repositories is on-going until August 5th and on the back of that ESMA will draft the clearing obligations for certain asset classes. It will be challenging for the industry to get to grips with EU substituted compliance that may be accepted by the CFTC within the timeframe required, as the speed of reform and regulation detail varies across jurisdictions.

  2. Anne Plested says:

    …Today 12th October marks the official birth of the Dodd–Frank Wall Street Reform and Consumer Protection Act. More than two years since the regulatory reforms were first conceived, the process of swap dealer registration and trade reporting will begin. This is the first milestone on the road toward the central clearing and transparent trading of swaps, as mandated by the G-20 in 2008…

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