Understanding the impact of Dodd-Frank on financial derivatives
Understanding the impact of Dodd-Frank on financial derivatives

The following Financial Services practice note provides comprehensive and up to date legal information covering:

  • Understanding the impact of Dodd-Frank on financial derivatives
  • Background to the Dodd-Frank Act
  • Swap dealers and major swap participants
  • Registration and regulation of swap dealers and major swap participants
  • Clearing and trading execution requirements
  • Recordkeeping and data reporting of swaps
  • Cross border derivatives regulation
  • 2012 definitions release
  • CFTC end-user exemption to clearing requirements for swaps
  • International Swaps and Derivatives Association (ISDA) Dodd-Frank protocol

Background to the Dodd-Frank Act

Following the financial crisis of the US capital markets in 2008, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) was enacted to increase the regulation of the US financial system. With respect to financial derivatives, Dodd-Frank:

  1. mandates the registration and regulation of 'swap dealers' and 'major swap participants' (both terms are discussed in further detail below)

  2. imposes clearing and trade execution requirements on standardised derivative products

  3. requires recordkeeping and data reporting of swaps, including real-time public reporting, and

  4. enhances federal agencies’ oversight over the swaps industry

Pursuant to Dodd-Frank, the US Commodity Futures Trading Commission (CFTC), which regulates the futures and option markets, and the US Securities and Exchange Commission (SEC) jointly regulate the derivatives markets. The CFTC regulates 'swaps' under the Commodity Exchange Act (CEA), and the SEC regulates 'security-based swaps' under the Securities Exchange Act of 1934, as amended (the Exchange Act). The CFTC and the SEC jointly share jurisdiction over 'mixed swaps', as defined in Section 721 (7 USCS § 6) of Dodd-Frank. These terms are defined and discussed in the '2012 Definitions Release' below.

Swap dealers and major swap participants

Who is a swap dealer?

The definitions of a 'swap dealer' and 'major swap participant' (MSP) are found in Section 721 of Dodd-Frank. The CFTC’s final rules regarding these definitions closely track Dodd-Frank, and define

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