Financial Message Board

OTC Trading Regulations

Regulation Changes to OTC Derivatives in the USA

It is likely that the new regulations would require swaps dealers and major swap participants to be regulated by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

The bill would also require that derivatives eligible for clearing must generally be cleared and traded through an exchange unless one of the parties to the swap is an end-user that is hedging commercial risk.

Their is also the controversial "push-out" provision. This provision states that no federal assistance i.e. Taxpayers money (including Federal Reserve loans or Federal Deposit Insurance Corporation (FDIC) insurance) may be given to any swaps entity, which includes a swap dealer.

This would likely prevent a bank from being a swap dealer because banks cannot, in practice, give up the right to receive Federal Reserve loans or FDIC insurance. The House bill does not include the push-out provision, so it is not clear what will happen when the House and Senate bills are reconciled to form the new law.

Changes Proposed by the Bank of International Settlements in Basel

The BCBS (Basel Committee on Banking Supervision) has also put forward a set of proposals aimed at the systemic risks posed by derivative activities.

• OTC derivative exposures will be subject to higher capital requirements based on stressed inputs and longer margining periods that reflect the liquidity.
• derivatives exposures that are not cleared through central counterparties that meet the revised CPSS/IOSCO standards will be subject to higher capital requirements, thus increasing incentives to use such central counterparties.
• exposures among major, interconnected financial institutions have a higher degree of correlation compared to exposures to the corporate sector and would therefore require relatively higher capital.