Swap users have concerns about Dodd-Frank

Washington, D.C., March 29, 2011 – The impact of Dodd-Frank on the safety and liquidity of the swaps markets from the perspective of end-users and buy-side firms continues to be a topic of hot debate as more than 100 representatives from the financial, legislative and regulatory communities outlined areas of concern and potential solutions during a forum today sponsored by Managed Funds Association (MFA), Institutional Investors and The Depository Trust & Clearing Corporation (DTCC).

“While Dodd-Frank is intended to protect the economy and the OTC derivatives markets and make their hedging markets more transparent and liquid, there is concern in the industry over potential unintended consequences of the new rules,” said Michael Bodson, DTCC’s chief operating officer, who opened the conference. “This forum will help identify issues of importance and outline potential elements of the solutions so that rule makers and lawmakers have the input and feedback they need as they move forward with implementing Dodd-Frank.”

“We appreciated the opportunity for market participants and policy makers to continue the dialogue about central clearing and transparency, both of which MFA strongly supports because of their essential role in reducing systemic, operational and counterparty risk for hedge funds and their institutional investors.” said Richard Baker, president and CEO of Managed Funds Association.

“Our derivatives markets play important roles in helping organizations manage commercial risk, gain access to financing, and efficiently deploy capital. Discussions like today’s help market participants and policy makers alike consider the potential for unintended consequences as we all strive to have markets that are liquid and safe, provide a level playing field for all participants, and that are supported by prudent regulation,” said John Gidman of Loomis Sayles & Company and chairman of the Association of Institutional Investors.

The conference keynote address was given by Senator Debbie Stabenow (D-MI), chairwoman of the U.S. Senate Committee on Agriculture, Nutrition and Forestry. The committee is responsible for overseeing implementation of Dodd-Frank and, in particular, Title VII, which establishes a new framework for governing the over-the-counter (OTC) derivatives market.

Congressman Jim Himes (D-CT), a member of the House Financial Services Committee, also delivered remarks during the forum and participated in a Q&A session with the audience.

"Capital is the most liquid asset in the world, and the laws that govern the financial industry need to recognize that,” said Himes. “We need a coordinated regulatory approach that encourages transparency and ensures that U.S. markets operate on a level playing field."

In addition, the event featured two panel discussions that included representatives from the legislative and regulatory staffs responsible for Dodd-Frank, as well as senior level representatives from asset managers, hedge funds, government sponsored entities, and corporate end-users from the trading, hedging, risk management, legal and compliance, and operations areas. The panels focused on how:

  • Pre- and post-trade transparency rules that result from the new trading and clearing rules will impact liquidity and the potential for unintended disclosure.
  • Firms manage the changes in collateral and default management for both centrally cleared and bilateral derivatives.

Transparency Key to Mitigating Systemic Risk

During his opening remarks, Bodson reinforced that the key to mitigating systemic risk in the swaps market lies in giving regulators transparent access to comprehensive market data. He noted the importance of having all underlying position data held in a single, central swaps data repository (SDR) to ensure that the totality of a firm’s positions can be seen from a central vantage point.

Bodson pointed to the role that DTCC’s Trade Information Warehouse (TIW) played in enhancing transparency in the credit default swaps (CDS) market during the financial crisis. The Warehouse’s centralized repository and its users include all the major OTC derivatives dealers and more than 1,800 buy-side firms and other market participants in more than 50 countries. It holds approximately 2.3 million contracts with a gross notional value of $29 trillion.

Bodson also stressed that achieving transparency across the entire OTC derivatives market will require significant cooperation between market participants and regulators. He added that a critical variable in the success of the TIW was that DTCC is not a traditional commercial entity, but rather an industry-governed utility, with buy-side firms, sell-side firms and self-regulatory organizations as stakeholders.

“It was essential to all parties involved that commercial concerns were removed from what all sides agree is – and should continue to be – primarily a regulatory and supervisory support function,” Bodson said.

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