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Regulatory Reform and OTC Derivatives – A Look at Key Changes Reshaping the Market

Journal 33: Technical Finance

Joe Anastasio, Pramod Achanta

This article discusses the impact of the Dodd-Frank Act on OTC derivatives, outlines the key elements of the Act affecting OTC derivatives trading, and provides an update on where the rule-making stands. We make predictions about four possible implications of the legislation on the derivatives landscape and offer a set of key questions that firms should consider as they reshape their business models to meet the new regulatory environment.

The Dodd-Frank Wall Street Reform and Consumer Protection Act imposes substantial new regulatory requirements on the over-the-counter (OTC) derivative business in the U.S. OTC market participants are mandated to comply with provisions of the Act by July 12, 2011.

The legislative authors laid out an aggressive timetable for rule-making to implement Dodd-Frank. However, the process has been slower than expected, and the bulk of the rules remain to be established. Still, the Act will unquestionably cause profound changes to how OTC derivative markets operate.

Other regions are watching closely to see what changes unfold in the new U.S. regulatory regime. Rule-making for the European Market Infrastructure Legislation (EMIL) proposed by the European Commission is to be completed by the end of 2011 for implementation a year later. Emerging markets and other G20 countries have different timelines and are early in their legislative processes. Figure 1 shows the uncertain timeline for detailed rules and implementation for the regulatory initiatives in different regions.

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