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Wolters Kluwer Law & Business Analyzes, Clarifies Derivatives Market Changes Under Dodd-Frank Act

Higher Scrutiny for Swaps, Trades and Transactions, But Is It Enough?

(RIVERWOODS, ILL., September 13, 2010) – For the first time, the $600 trillion derivatives market will operate under federal regulations and reforms outlined in the Dodd-Frank Wall Street Reform and Consumer Protection Act, according to Wolters Kluwer Law & Business. Wolters Kluwer Law & Business is a leading provider of information and software solutions in key specialty areas for legal and business professionals, with products under the CCH and Aspen names (wolterskluwerlb.com).

The new legislation is designed to provide transparency and greater efficiency in processing derivatives by requiring the reporting of contract terms to regulators and market participants. Major components in the derivatives title within the act include:

  • Mandatory trading and clearing of swaps and security based swaps;
  • Mandated reporting of swaps and security based swaps; and
  • Real-time price reporting for all swap transactions, including customized swaps.

End user clearing exemptions exclude businesses which must make significant investments in certain commodities in order to operate. For example, commercial airlines needing to purchase jet fuel may continue to invest in petroleum contracts, options and fuel hedges without additional regulations. The act also calls for all traded swaps to be exchanged on a designated contract market or a swap execution facility. All security-based swaps must be traded on either an exchange or through a swap execution facility.

“The Dodd-Frank Wall Street Reform and Consumer Protection Act works as a sea change by closing a huge regulatory gap and bringing accountability and transparency to the previously unregulated OTC derivatives market,” said Wolters Kluwer Law & Business Principal Securities Law Analyst James Hamilton, JD, LLM, one of the lead analysts for Wolters Kluwer Law & Business’ Dodd-Frank Wall Street Reform and Consumer Protection Act: Law, Explanation and Analysis. “The new regulatory framework now requires most OTC derivatives to be traded on an exchange and cleared through centralized clearinghouses, but it doesn’t specify how to avoid potential conflicts of interest involving control over those clearinghouses."

From Lynch Amendment to “Lynch Lite”: Preserving Open and Fair Access

To prevent financial industry giants and major swap traders from taking control of new derivatives clearinghouses, the Lynch Amendment was added to the bill passed by the House of Representatives in December 2009. The amendment would have imposed a 20-percent voting stake limitation on clearinghouse and trading facility ownership. It also proposed that a majority of directors overseeing a clearing organization, swap-execution facility or board of trade could not be associated with a restricted owner. However, the Lynch Amendment was not included in the final legislation.

Instead, the Dodd-Frank Act features Sections 726 and 765 – requiring the Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC) to adopt rules eliminating conflicts of interest. Because the full amendment was replaced with shorter, less-specific language in the final bill, many refer to Sections 726 and 765 as “Lynch Lite.” Some feel the broadly worded sections are appropriate governance rules for mitigating potential conflicts of interest, but others argue the Lynch Amendment would have provided greater market access by leveling the playing field.

New Exchange Rules Aimed at Stabilizing Economy

Although many factors led to recent economic instability, volatile swings in financial markets and government interventions to bail out failing businesses, a major contributor to the financial crisis was the unregulated OTC derivatives market. For derivatives trading, the Dodd-Frank Act provides the SEC and CFTC greater oversight of the OTC derivatives market and sheds light on derivatives trading that was allowed to happen without regulatory approval.

“OTC derivatives contracts have never been completely transparent and have even been opaque. This legislation is designed to bring greater transparency to the market for derivatives,” said Hamilton.

For More Information

Members of the press interested in speaking with Wolters Kluwer Law & Business securities and banking law experts should contact Leslie Bonacum at 847-267-7153, mediahelp@cch.com; or Eric Scott at 847-267-2179, eric.scott@wolterskluwer.com.

For a Briefing on Dodd-Frank, visit the Financial Reform News Center at http://financialreform.wolterskluwerlb.com. The Center provides the legal community and others with a cohesive and robust selection of new developments and analysis. Additionally, Jim Hamilton’s World of Securities Regulation offers unique analysis on securities law and regulation. 

Wolters Kluwer Law & Business also offers two authoritative new references on the historic reform law. Available now is the Dodd-Frank Wall Street Reform and Consumer Protection Act: Law, Explanation and Analysis.

For further analysis on the national financial impact of the Dodd-Frank Act, the upcoming Wolters Kluwer Law & Business publication, Securities and Derivatives Reform in 2010: A Guide to the Legislation, focuses on the securities aspects of the bill. It is scheduled for an October 2010 release and also includes elements such as codification, rule-making proposals, industry reaction and expert commentary.

Members of the news media interested in receiving a complimentary copy of either reference book should contact Leslie Bonacum, 847-267-7153 or mediahelp@cch.com.

About Wolters Kluwer Law & Business

Wolters Kluwer Law & Business is a leading provider of research products and software solutions in key specialty areas for legal and business professionals, as well as casebooks and study aids for law students. Its major product lines include Aspen Publishers, CCH, Kluwer Law International and Loislaw. Its markets include health care organizations, law firms, law schools, corporate counsel and professionals requiring legal and compliance information. Wolters Kluwer Law & Business, a unit of Wolters Kluwer, is based in New York City and Riverwoods, Ill. Wolters Kluwer is a market-leading global information services company.

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