End users - such as companies, farmers and utilities - in every state utilize derivatives as a key tool to protect against risks that are inherent to their businesses. For example, an electric utility can use derivatives to protect against the risk of future price increases on the specific quantity of fuel it needs to serve customers and protect against cost increases to them. Derivatives also allow financial institutions to hedge their exposure to credit risk, which helps them expand their lending and investment capabilities, fostering economic growth.
Examples of derivatives which are subject to new regulation under Title VII of the Dodd-Frank Act include interest rate, credit default and equity swaps, to name a few.
Dodd-Frank's Title VII mandates regulators, including the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), to undertake rulemakings designed to meet G20 objectives of increasing transparency and reducing systemic risk in the derivative markets, including:
- Reporting swap transactions to a swap data repository;
- Clearing sufficiently liquid and standardized swaps on central counterparties;
- Where appropriate, trading standardized swaps on trading platforms; and
- Setting higher capital and minimum margin requirements for uncleared swaps.
The CFTC has completed most of its Title VII mandated rulemakings, establishing a regime of regulatory oversight for many new entities, including swap intermediaries known as "Swap Dealers" and "Major Swap Participants" (MSPs), as wells as clearing houses and trading platforms. The SEC is also well underway in regards to its rulemaking and implementation of requirements covering security-based swaps (or "SBS").
Under this new regime, sufficiently liquid and standardized derivatives transactions are required to be centrally cleared, and the most liquid of those are required to be executed on platforms. However, some derivatives still fall into the category of over-the-counter (OTC), which means that their terms are privately negotiated between two parties, and some will also remain uncleared. These non-centrally cleared swaps will be subject to new margin requirements based international standard developed by the Basel Committee on Banking Supervision and International Organization of Securities Commissions.
The Dodd-Frank Act established a broad, new regulatory regime, which stands to have profound effect on the market. New regulatory provisions will impact swap dealers, major swap participants, asset managers and other end-users, such as manufacturers, financial institutions, and agricultural concerns.
SIFMA believes that Dodd-Frank took several important and necessary steps with respect to improving transparency in the derivatives markets. SIFMA supports the implementation of appropriate regulation to meet this goal, without creating outsized costs or unduly limiting of the availability of these valuable risk management tools for American business.
SIFMA is working with the CFTC and SEC, and other regulators that are undertaking rulemaking proceedings to implement the derivatives-related provisions of the Act. SIFMA remains committed to educating legislators, regulators, and others market participants about the types and uses of derivatives, as well as the integral role they play in our economy.