The New Swaps Regulatory Framework Under Dodd-Frank

August 11, 2010
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Act”) marks the first significant overhaul of US financial markets since the Great Depression. An historic piece of legislation, the Act was necessitated in part by Main Street’s view that the recent recession was caused or accelerated by the swaps market, primarily credit default swaps, an opaque over-the-counter market largely traded in the inter-bank and institutional markets.

The swaps market had grown so large and created such financial inter-connectedness among US and foreign banks, funds, and other financial institutions, that its near-failure to efficiently operate without a government bailout was a sign that a new regulatory framework was needed. As such, 445 of the Act’s 2139 pages are dedicated to the creation of a regulatory infrastructure over swaps and those persons engaged in swap activities, swap markets, swap trading, and reporting.

Whether this new regulatory structure will reduce systemic risk concerns and increase the cost of entering into hedging activities for end users, and whether the pus-out rules will make banks and financial institutions much less strong and more at risk, remains to be seen. In the final analysis, the actual effectiveness of the Act and the complete scope of its coverage can only be determined once the more than 100 rules required of the Commodities Futures Trading Commission and the Securities and Exchange Commission are completed.

O’Melveny has created a summary of the Act’s impact on the swaps market, intended to provide clients and friends with an understanding of the regulatory construct and how the Act builds a regulatory infrastructure around the swaps market.

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Related Materials:

O'Melveny recently published an alert offering a high-level overview of the major feature of the act and its likely impact on the US financial services industry. Click here to read the full text of this Client Alert.

Senior lawyers in O'Melveny's Corporate Finance Practice recently published an alert summarizing the key provisions of the Act impacting public companies. Click here to read the full text of this Client Alert.