A derivative is a financial instrument in which the value depends on, or is derived from, the value of an underlying asset, index, rate, or instrument.
The total notional amount of all outstanding positions in the global over-the-counter (OTC) derivatives market is valued at over $600 trillion. OTC derivatives are traded between counterparties in transactions that are not executed on an organized exchange, but instead are privately negotiated on a bilateral basis between counterparties.
Credit default swaps (“CDS”), interest rate swaps, total return swaps, forward contracts on physical commodities and currencies, equity derivatives and other similar products are traded in OTC derivatives markets.
OTC derivatives are of great importance to MFA members as many of the funds they manage are active investors in these products. MFA members depend on reliable counterparties and market stability in the OTC derivatives markets. Thus, MFA has played an important role in improving market practices in the marketplace, both through collaboration with major derivatives dealers and other industry participants, and through its advocacy in numerous comment letters to the CFTC, the SEC and the prudential regulators in response to their proposed rulemakings under Title VII of Dodd-Frank, as well as in face-to-face meetings and hearings with policymakers and regulators. Over the last ten years, OTC derivatives have become a critical means by which funds manage the risk and returns of the assets in their portfolios in order to meet the objectives of their underlying investors, such as pension plans, university endowments and other institutions with obligations to their beneficiaries. MFA and its members have consistently supported and participated in industry efforts to improve the operational infrastructure and efficiency of the OTC derivatives markets. Since Dodd-Frank’s enactment in July 2010, MFA and its members have been actively participating in shaping the final rules under Title VII of Dodd-Frank by voicing their support for central clearing and real-time trade processing and by advocating their positions on adequate protections for customers’ collateral and position limits, among other key regulatory reforms. In addition to the OTC derivatives market reform occurring in the U.S., MFA and its members have been monitoring OTC derivatives regulatory reforms in Europe and Asia, urging U.S. policymakers and regulators to enhance their coordination with their counterparts in other jurisdictions to avoid inconsistent and duplicative regulations in the global marketplace.