The following Banking & Finance guidance note Produced in partnership with Anthony R.G. Nolan and Rachel M. Proctor of K&L Gates LLP provides comprehensive and up to date legal information covering:
This Practice Note:
provides an introduction to non-cleared swaps
describes the basic framework for documenting non-cleared swaps
provides an overview of the Dodd-Frank documentation for non-cleared swaps
addresses the regulatory requirements for posting and collecting margin for non-cleared swaps, and
discusses how collateral is protected when entering into non-cleared swaps
Prior to the introduction of the clearing mandate under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the market for swaps and other over-the-counter (OTC) derivatives transactions in the United States was characterized by bilateral arrangements. Counterparties interested in entering into a swap would approach swap dealers (SD) privately to learn about the pricing terms they were willing to offer and, once commercial terms were agreed upon with a given dealer, the parties would typically enter into the swap by executing a bilateral agreement off-exchange. The parties would face each other and make payments to each other directly.
Following the 2008 financial crisis, the opacity of the bilateral swaps market, and the potential for a default by a large swap counterparty to threaten the solvency of its counterparties was viewed as a threat to the overall stability of the financial system. As a result, a cornerstone of the Dodd-Frank Act was the requirement that standardized swaps be centrally cleared. See Practice Note: Introduction to clearing of swaps and security-based swaps under Title VII of the Dodd-Frank Act for more information on the clearing requirements.
However, non-cleared swaps continue to play a role in the market for swaps and other OTC derivatives transactions. While the clearing mandate for swaps under the Dodd-Frank Act marked a significant shift in the
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