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Dodd-Frank Wall Street Reform and Consumer Protection Act

Seen as the greatest financial reform since the Great Depression, on June 30, 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by the U.S. House of Representatives and signed into law by the President on July 21 of the same year.

The law covers a wide array of financial reforms, but a few of the titles focus specifically on derivatives reform. Below are three of the sections of Dodd-Frank that apply to derivatives and the finance industry:

  • Title IV - Regulation of Advisers to Hedge Funds and Other Institutions:
    • Hedge Funds are required to register with the SEC and report financial information that was once only available to their clients. The new law became effective March 30, 2012.
  • Title VI - Improvements to Regulation of Bank and Savings Association Holding Companies and Depository Institutions:
    • In this section, "The Volker Rule" was established. Named after the former United States Federal Reserve Chairman, Paul Volker, the rule was designed to prevent banking entities from engaging in short-term proprietary trading. The original rule outlined that banks should be prevented from owning hedge funds or private equity funds. This section also restricted banking entities from partaking in particular activities that would result in exposure to high-risk trading strategies or high risk assets or pose a threat to the financial stability of the country or to the entity itself, amongst others.
  • Title VII - Wall Street Transparency and Accountability "The Derivatives Legislation":
    1. Two governing bodies will be responsible for regulating the swaps market and creating new rules to support this section of the law. These two organizations are the Securities and Exchange Commission (SEC), which is responsible for overseeing "security-based swaps" (eg, single name CDS, TRS on single security), and the Commodity Futures Trading Commission (CFTC) which will oversee other swaps including commodity, rate, foreign exchange, etc.
    2. Firms must register as either Swaps Dealers, Major Swaps Participants or End Users.
    3. Clearing: Regulators will specify which swaps need to be cleared through Central Counterparty Clearing Houses (CCPs)
    4. Execution: Cleared swaps must be traded either on an exchange or a Swap Execution Facility (SEF).
    5. Swap trades will be reported to Swaps Data Repositories (SDRs) immediately following trade execution, whether they are executed on SEFs, exchanges or bilaterally.
    6. End users can apply for exemption from central clearing.

We hope that this information will assist you, but it should not be used or relied upon as a substitute for your own independent research. For a more comprehensive view of the standards/requirements, please visit the respective issuer's website.