OTC Derivatives

Derivatives play an important role in the capital markets and the broader economy by allowing companies to manage and hedge risk. Companies in every state and across diverse industries utilize derivatives as a key tool to protect against risks that are inherent to their businesses.

For example, derivatives allow financial institutions to hedge their exposure to interest rate and credit risk, which helps them expand their lending and investment capabilities. Asset managers also use derivatives in the portfolios they manage to hedge risks (such as interest rate, currency and credit risks), as well as to efficiently and inexpensively gain exposure to certain asset classes. Derivatives are not just used by financial firms. Corporate end-users rely on derivatives to hedge various risks inherent to their businesses (currency, interest rate, energy, etc.) and farmers and ranchers, as another example, rely on derivatives to hedge the risk of commodity pricing volatility, helping to maintain stable food prices for consumers.

SIFMA believes that Title VII of the Dodd-Frank Act, which established a broad new regulatory regime for over-the-counter (OTC) derivatives, took several important and necessary steps towards improving oversight and transparency in OTC derivatives markets, and as such, we support the implementation of appropriate regulations that do not create undue costs or unduly limit the availability of these valuable risk management tools for American businesses.

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, as SIFMA supports and encourages efforts aimed at simplifying and harmonizing Title VII. In addition, inconsistencies in the implementation of derivatives regulations, both at home and around the globe, have magnified the need for coordination among regulatory authorities.

SIFMA continues to work with the regulators implementing derivatives regulations – CFTC, SEC, Prudential Regulators, and SROs, as well as non-US regulators and global standard setters, when appropriate – focusing on simplifying, harmonizing, and streamlining the requirements to eliminate unnecessary inconsistencies, overlap, and outstanding issues that have caused undue competitive disparities, market fragmentation, and barriers to entry and innovation.

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:

  • Capital and Margin Requirements for Non-Centrally Cleared Derivatives
  • Cross Border Application of Title VII and Substituted Compliance
  • CFTC/SEC Coordination and Harmonization
  • Swap Dealer/Security-Based Swap Dealer Requirements
  • CPO/CTA Regulations
  • Regulatory Treatment of Separately Managed Accounts
  • CFTC SEF/Trading Requirements
  • SDR/SBSDR Reporting Requirements

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