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Wall Street Reform and Consumer Protection ActImpact on Over-the-Counter Derivatives

July 26, 2010

By Robert A. Claassen & Peiyi Zhao

The Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) represents the largest overhaul of the U.S. financial system since the Great Depression. Title VII of the Dodd-Frank Act, the Wall Street Transparency and Accountability Act (Transparency and Accountability Act, or Act), puts in place a number of new regulations on the $600 trillion over-the-counter (OTC) derivatives market. The Act authorizes the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) to establish a regulatory regime where a significant portion of OTC derivatives transactions will be subject to mandatory clearing and trading, and require reporting of derivative transactions to a registered swap data repository. Swap dealers and major swap participants, as defined in the Act, will be required to register with the CFTC and/or the SEC, to comply with new business conduct standards, and to meet new capital and margin requirements. The CFTC and SEC are also authorized to establish position limits on derivatives. A push-out provision in the Act prohibits certain insured depository institutions from obtaining federal bailout money if they engage in risky derivatives activities, unless they push out their derivatives activities to affiliates.

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