KEYWORDS: buy-side firm, CCP, central clearing, central counterparties, counterparty risk, credit risk, derivative, Dodd-Frank Act, FCM, hedge fund infrastructure, Hedge Fund Regulation, margining, OTC derivatives, regulatory reform, risk management, transparency
Rabih Ramadi, Jonathan Cohn, Belal Khalid
The Dodd-Frank Act sets out a new structure for regulating swap market participants, intermediaries, trading platforms, and clearing entities. Central clearing is a critical component of the Dodd-Frank Act’s regulatory regime for swaps and one of its primary means of reducing systemic risk in the financial markets. In the first phase of central clearing, certain credit default swaps and interest rate swaps will be subjected to mandatory clearing shortly followed by nondeliverable FX forwards. By bringing comprehensive regulation and mandating that standardized swaps be brought to a clearing and transparent trading environment, the Dodd-Frank Act helps lower risk and brings openness and competition to these markets.