By David
Oakes, Dauphin Financial Training Inc.
The Commodity Futures
Trading Commission (CFTC) and the Securities
Exchange Commission (SEC) share responsibility for implementing the DF
reforms, with the CFTC having authority over swaps, swap dealers and major swap
market participants, and the SEC having authority over security-based swaps,
security-based swap dealers and major security-based swap market participants;
the term swap is defined so as to include most types of derivative security. Dealers and major market participants must
register with the CFTC and the SEC, and many standard derivative products must
now be centrally cleared. The CFTC and
the SEC decide which swaps or swap products are subject to this clearing
obligation. Transactions in
contracts that are not subject to the clearing obligation must be reported to a
trade repository; this trade-reporting
obligation is already in effect.
Some of the swap products that are subject to the clearing obligation
have been determined made
available to trade (MAT). These
products must be traded on a designated
contract market (DCM) or on a swap
execution facility (SEF). A DCM
is an exchange, while a SEF is a trading system in which parties have the
ability to execute or trade swaps by accepting bids or offers from multiple
participants. The intent of these
reforms is to make OTC derivatives market more closely resemble exchange-traded
derivatives markets.
European reforms distinguish between financial counterparties (FC) and non-financial counterparties (NFC).
FCs, as well as NFCs who exceed certain volume thresholds (known as NFC+s), must clear OTC derivatives with
a central counterparty. All trades must
be reported to a trade repository. Since
the US reforms do not distinguish FCs from NFCs and have no volume thresholds,
the same entity may face different obligations in the two cases. Mandatory clearing is also being phased in
over a longer period (up to three years) in the EU. Derivatives that are sufficiently liquid and
eligible for clearing will ultimately have to be traded on an organized trading facility (OTF) or a
regulated market, but the OTF structure has not been finalized, so it is
uncertain what adjustments a SEF might have to make to be recognized as an OTF.
By increasing transparency, these parallel reforms should
help reduce systemic risk, but their complex cross-border nature and the subtle
differences in the obligations they impose are likely to
prove challenging to market participants for some time to come.
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