OTC Derivatives Regulation
|Proposal Date||EC Approval||Effective Date|
|September 15, 2010||December 19, 2012||March 15, 2013|
OTC derivatives are instruments traded in venues other than on organized exchanges, or designated contract markets. Subsequent to financial crises, which many say were exacerbated by the "opacity" of the unregulated OTC markets, regulators in the United States and abroad have begun enacting and implementing rules concerning OTC derivatives. Most notably, these regulations include the Dodd-Frank Act in the U.S., Markets in Financial Instruments Directive (MiFID) and EMIR in Europe, and international efforts such as Basel III. <ref>Dodd-Frank Act: Regulation of Over-the-Counter Derivatives (Title VII). KPMG. Retrieved on November 10, 2011.</ref> <ref>Investment Services Directive – Markets in Financial Instruments Directive. European Commission. Retrieved on November 10, 2011.</ref>
OTC Derivatives and the Dodd-Frank Act
Among the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 are mandates to create a framework for regulatory oversight of swaps and OTC derivatives. The SEC is to have jurisdiction over "security-based swaps;" the CFTC will regulate all other swaps. For more information on definitions of swap-related terms, see the MarketsReformWiki page on Swaps Definitions Regulation. Among the mandates:
- Any swap transaction "made available for trading" must trade on either a designated contract market or a swap execution facility, a new type of entity created by Dodd-Frank.
- When possible, swaps should be cleared by a central counterparty. Rules regarding derivatives clearing organizations were finalized at the CFTC Open Meeting, October 18, 2011.
- All relevant swap data shall be submitted and stored at a swap data repository.
OTC Derivatives Regulation in Europe
OTC derivatives reform in Europe is being conducted by the European Securities and Markets Authority (ESMA) under the name European Market Infrastructure Regulation, or "EMIR." On June 25, 2012, The issued its Draft Technical Standards for the Regulation on OTC Derivatives, CCPs and Trade Repositories. ESMA Published its final report on draft technical standards on September 27, 2012. The final report has been sent to the European Commission, who will decide to amend or adopt the standards. To view a summary of the final report, click the link below.
In July 2012, the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO) published a consultative paper on margin requirements for non-centrally-cleared derivatives. The July document laid out the framework for margin and capital requirements for swaps and other derivatives that exist outside a centrally-cleared environment. The paper included a list of key principles under which the framework would be developed, and also included a list of questions on which market participants were asked to comment.
In February 2013, BIS and IOSCO issued the second consultation on the margin issue for non-cleared derivatives, which looks at liquidity and the impact of margin requirements on financial market participants. In September 2013 the final document was issued.
Though the cross-border rulemaking process has been at times contentious - between regulators and market participants, as well as between jurisdictions - global conversations have continued. On July 11, 2013, the CFTC and the European Union, led by Michel Barnier, the commissioner tasked with overseeing the developing the rules in Europe, announced the "Path Forward" toward synchronized regulation of the OTC derivatives market.
To view the "Path Forward" click HERE.
On July 12, 2013, the CFTC approved final interpretive guidance and a policy statement regarding cross-border activities related to the Dodd-Frank Act. The commission also approved an exemptive order that will phase-in compliance with cross-border activities.