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Impact of the Dodd-Frank Act on OTC Derivatives: Challenges Reign

Impact of the Dodd-Frank Act on OTC Derivatives: Challenges Reign

FinReg seeks to address systemic financial risk in OTC swap transactions, but a number of issues remain.

By John Jay

Boston, April 28, 2011 – A new report from Aite Group addresses the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (aka FinReg) on over-the-counter (OTC) derivatives, and discusses outstanding issues associated with its implementation.

Key among the issues FinReg seeks to address is systemic financial risk in the trading, clearing, and reporting of OTC swap transactions, but a number of issues remain. Lack of clarity over definitions and terms, jurisdictional confusion resulting from oversight divided between the SEC and CFTC, connectivity issues for trading firms dealing with various types of swaps, and probable increases in trading costs and necessary IT investments are but a few of the issues with which the OTC derivatives industry will have to contend surrounding the implementation of FinReg.

“With respect to the trading, clearing, and reporting of OTC derivatives, uncertainty reigns where FinReg treads,” says John Jay, senior analyst with Aite Group and co-author of this report. “Despite the legislation’s pursuit of minimizing systemic risk through increased transparency requirements, market structure, legal, and operational issues are no more clear today than when the Dodd-Frank Act passed in July 2010.”

“At this stage, the best that can be said about the Dodd-Frank Act is that it will have a far-reaching and substantial impact on the OTC derivatives marketplace,” says Paul Zubulake, senior analyst with Aite Group and co-author of this report. “The sole saving grace is that market participants expect regulators to allow implementation of rules governing the trading, clearing, and reporting of OTC derivatives to occur over time.”

This 21-page Impact Note contains five tables. Clients of Aite Group's Institutional Securities & Investments service can download the report.