Research & Thoughts

Regulatory Reform and OTC Derivatives

A look at key changes reshaping the market. And four predictions.

This Capco Thoughts white paper discusses some of the Dodd-Frank Act’s significant effects on OTC derivatives trading. It also provides an update on the status of rulemaking, discusses four possible effects the act may have on the derivatives business, and suggests key questions for firms to consider as they adapt their business models to the new regulatory environment.

U.S. financial regulators are grinding through the process of implementing rules that will tighten control of the over-the-counter (OTC) derivative business. The Dodd-Frank Wall Street Reform and Consumer Protection Act introduces stringent new requirements to the OTC market including use of central counterparties and trade repositories and tighter transaction reporting deadlines. The legislation imposes an aggressive timetable for rulemaking, however that process has been slower than expected, and many rules are still to be established. 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 rulemaking 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 on how OTC derivative markets operate.

Other regions are watching closely to see what changes unfold in the new U.S. regulatory regime. Rulemaking 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.

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