Introduction to non-cleared swaps under Title VII of the Dodd-Frank Act
Produced in partnership with Anthony R.G. Nolan and Rachel M. Proctor of K&L Gates LLP
Introduction to non-cleared swaps under Title VII of the Dodd-Frank Act

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:

  • Introduction to non-cleared swaps under Title VII of the Dodd-Frank Act
  • Background
  • Non-cleared swaps
  • ISDA Dodd-Frank Protocols and Questionnaires
  • Margin Requirements for Non-Cleared Swaps

This Practice Note:

  1. provides an introduction to non-cleared swaps

  2. describes the basic framework for documenting non-cleared swaps

  3. provides an overview of the Dodd-Frank documentation for non-cleared swaps

  4. addresses the regulatory requirements for posting and collecting margin for non-cleared swaps, and

  5. discusses how collateral is protected when entering into non-cleared swaps

Background

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

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