OTC Derivatives

Title VII of the Dodd-Frank Act enacted beneficial reforms that have enhanced transparency and mitigated risks in the OTC derivatives market. The implementation of Title VII, however, has been unduly complex, costly and over-engineered. With Title VII’s reforms largely in place, it is now possible to evaluate the implementation of those reforms with a view towards preserving beneficial aspects that have improved markets, while minimizing those that have unnecessary and undesirable consequences.

Implementation issues have impeded U.S. access to global and regional markets, end-user access to funding and liquidity and efficient risk management. The regulatory agencies responsible for implementation of derivatives regulations – CFTC, SEC and U.S. Prudential Regulators (Federal Reserve, OCC, FDIC, FHFA and FCA) – should engage in a holistic review of their respective regimes, focusing on the impact of Title VII rulemaking, and consider appropriate modifications to remedy outstanding issues that have caused undue competitive disparities, market fragmentation and barriers to entry and innovation, among other concerns.  Addressing these issues can help promote U.S. competitiveness, job creation and economic growth, without undercutting beneficial aspects of Title VII.

Priority issue areas include:

  • Cross-Border Application of Title VII Framework: The CFTC, SEC, and U.S. Prudential Regulators should modify Title VII’s cross-border framework to reverse market fragmentation by creating a level playing field for U.S. and non-U.S. firms
  • Margin Requirements for Non-Centrally Cleared Swaps: The CFTC, SEC and U.S. Prudential Regulators, working together and with their international counterparts as appropriate, should take steps to recalibrate margin requirements to unlock resources for lending and investment by focusing the requirements solely on what is appropriate to mitigate risk, including removing impediments to effective risk management by exempting inter-affiliate swaps
  • Regulatory Harmonization and Coordination: The CFTC, SEC and U.S. Prudential Regulators, in coordination with their foreign regulatory counterparts, should work together to avoid duplicating each other’s roles and making rules that conflict with each other’s rules or policies; engage in information sharing; and identify opportunities to simplify, harmonize and streamline trading, trade reporting, business conduct and capital requirements

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