Posted on 10-Aug-2018 19:13:45
Being someone working on the Dodd Frank projects for couple of years, I have seen many developers and testers who are looking out for resources to gain knowledge on this regulation called Dodd Frank. Some of them have asked me Where do I start?
There is loads of information on the net but most of these articles or documents assume prior knowledge on the basics (products, definitions, etc) or they have too many legal terms for a normal developer to follow it. I will try and cover some of the basic points in simpler words.
I dont want to cover how the financial crisis occurred in 2008 but in the wake of that crisis, several regulations have been lined up across different regions (US, EMEA, APAC) for the Swaps market. The first of them is DF.
Now, what are the basic things to know in Dodd Frank regulation applicable to OTC Derivatives.
First would be the OTC products that are eligible for DF. As I understand, following are eligible under the different asset classes (I might have missed few as there are too many exotic products but I believe this is decent enough to start with).
There is further classification of above products into Security Based Swap and Non Security Based Swaps. The SBS categories are determined by the SEC and Non SBS are determined by CFTC.
Next is to identify which players in the OTC space need to adhere to DF.
As the DF regulation is in the US, its the US Persons and Non-US Persons trading with US Persons.
There is an official definition of US Person but in simpler terms, a US Person is:
Individuals (Residents) in US, Corporations or its Affiliates (Entities) Incorporated in US or those having its principal place of business in the US, Non US Branches of US Incorporated Corporations or its Affiliates (Entities), Beneficial Owners of Accounts in US (eg: Funds in US trading through Investment Advisors), Commodity Pools and Other Collective Investment Vehicles in the US
Following are currently exempted from US person under the Cross Border Exemption. And some these might fall into scope when that exemption ends .
A Non US person trading with Non US counterparty with a US Guarantor for either of the two parties.
A Non US Fund trading through an Investment Advisor in the US. Note: Trades of a party against a counterparty can be Guaranteed by another party.
After getting to know which products are eligible for DF and who a US person is, the next is to understand the definitions of Major Swap Participant and Swap Dealer.
Again, there is an official definition and huge documentation on this but in general, an MSP is any person that has substantial counterparty exposure and holds substantial position in the swaps market which could have adverse effects on the US banking system and the financial markets.
The substantial position is determined by two tests The first test would account for current uncollateralized exposure and the second test would account for both current uncollateralized exposure and potential future exposure.
Swap Dealer is any person who is a Dealer or Market Maker in the Swaps market and regularly enters into Swaps for its own account. Any person whose trading activity exceeds the De-Minimis exemption limits needs to register as a Swap Dealer with the National Futures Association.
The aggregate effective notional amount, measured on a gross basis, of the swaps that the person enters into over the prior 12 months in connection with dealing activities must not exceed $100 million.
The aggregate effective notional amount of such swaps with special entities over the prior 12 months must not exceed $25 million.
The person must not enter into swaps as a dealer with more than 15 counterparties,other than security based swap dealers, over the prior 12 months.
The person must not enter into more than 20 swaps as a dealer over the prior 12 months.
The following are the rules for Reporting, Clearing and Business Conduct obligations for MSPs, Swap Dealers and other parties trading/dealing in Swaps. I am not covering these here and will cover each of these separately.
Real Time Reporting and Swap Data Reporting
Internal and External Business Conduct Rules
PS: I posted this in Aug 2013 on my personal blog.