The Dodd-Frank Act
To address these changes in the derivatives markets as well the real weaknesses in swaps market oversight exposed by the financial crisis, Congress included a significant package of reforms in the Dodd-Frank Act.
Broadening the Scope
Foremost, the Dodd-Frank Act broadened the scope of regulatory oversight of the derivatives market. The CFTC and the Securities and Exchange Commission (SEC) will, for the first time, have oversight of the swaps and security-based swaps markets.
Furthermore, the Dodd-Frank Act extended the CFTC’s oversight to include registering foreign boards of trade providing direct access to U.S. traders. A foreign board of trade seeking to register in the U.S. will have to establish certain rules similar to U.S. exchanges. This new authority enhances the Commission's ability to ensure that U.S. traders cannot avoid essential market protections by directly trading economically equivalent contracts on foreign exchanges.
Importantly, the Dodd-Frank Act brings transparency to the derivatives marketplace. Economists and policymakers for decades have recognized that market transparency benefits the public.
The more transparent a marketplace is, the more liquid it is, the more competitive it is and the lower the costs for hedgers, borrowers and their customers.
The Dodd-Frank Act brings transparency in each of the three phases of a transaction.
First, it brings pre-trade transparency by requiring standardized swaps – those that are cleared, made available for trading and not blocks – to be traded on exchanges or swap execution facilities.
Second, the Dodd-Frank Act brings real-time post-trade transparency to the swaps markets. This provides all market participants with important pricing information as they consider their investments and whether to lower their risk through similar transactions.
Third, the Dodd-Frank Act brings transparency to swaps over the lifetime of the contracts. If the contract is cleared, the clearinghouse will be required to publicly disclose the pricing of the swap. If the contract is bilateral, swap dealers will be required to share mid-market pricing with their counterparties.
Additionally, the Dodd-Frank Act includes robust recordkeeping and reporting requirements for all swaps transactions so that regulators can have a window into the risks posed in the system and can police the markets for fraud, manipulation and other abuses.