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The Dodd-Frank Wall Street Reform and Consumer Protection Act - Title VII, Derivatives (Paperback)
Loot Price: R377
Discovery Miles 3 770
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The Dodd-Frank Wall Street Reform and Consumer Protection Act - Title VII, Derivatives (Paperback)
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Loot Price R377
Discovery Miles 3 770
Expected to ship within 10 - 15 working days
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The financial crisis implicated the over-the-counter (OTC)
derivatives market as a major source of systemic risk. A number of
firms used derivatives to construct highly leveraged speculative
positions, which generated enormous losses that threatened to
bankrupt not only the firms themselves but also their creditors and
trading partners. Hundreds of billions of dollars in government
credit were needed to prevent such losses from cascading throughout
the system. AIG was the best-known example, but by no means the
only one. Equally troublesome was the fact that the OTC market
depended on the financial stability of a dozen or so major dealers.
Failure of a dealer would have resulted in the nullification of
trillions of dollars' worth of contracts and would have exposed
derivatives counterparties to sudden risk and loss, exacerbating
the cycle of deleveraging and withholding of credit that
characterized the crisis. During the crisis, all the major dealers
came under stress, and even though derivatives dealing was not
generally the direct source of financial weakness, a collapse of
the $600 trillion OTC derivatives market was imminent absent
federal intervention. The first group of Troubled Asset Relief
Program (TARP) recipients included nearly all the large derivatives
dealers. The Dodd-Frank Act (P.L. 111-203) sought to remake the OTC
market in the image of the regulated futures exchanges. Crucial
reforms include a requirement that swap contracts be cleared
through a central counterparty regulated by one or more federal
agencies. Clearinghouses require traders to put down cash (called
initial margin) at the time they open a contract to cover potential
losses, and require subsequent deposits (called maintenance margin)
to cover actual losses to the position. The intended effect of
margin requirements is to eliminate the possibility that any firm
can build up an uncapitalized exposure so large that default would
have systemic consequences (again, the AIG situation). The size of
a cleared position is limited by the firm's ability to post capital
to cover its losses. That capital protects its trading partners and
the system as a whole. Swap dealers and major swap
participants-firms with substantial derivatives positions-will be
subject to margin and capital requirements above and beyond what
the clearinghouses mandate. Swaps that are cleared will also be
subject to trading on an exchange, or an exchange-like "swap
execution facility," regulated by either the Commodity Futures
Trading Commission (CFTC) or the Securities and Exchange Commission
(SEC), in the case of security-based swaps. All trades will be
reported to data repositories, so that regulators will have
complete information about all derivatives positions. Data on swap
prices and trading volumes will be made public. The Dodd-Frank Act
provides exceptions to the clearing and trading requirements for
commercial end-users, or firms that use derivatives to hedge the
risks of their nonfinancial business operations. Regulators may
also provide exemptions for smaller financial institutions. Even
trades that are exempt from the clearing and exchange-trading
requirements, however, will have to be reported to data
repositories or directly to regulators.
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