Future tense

11 Mar 2013 By Daniel Indiviglio

As Dodd-Frank changes take effect, some formerly opaque derivatives are reappearing as futures. That’s a regulated and fairly transparent market. But capital and disclosure requirements aren’t quite as tight as lawmakers intended for swaps. It’s regulatory arbitrage in action.

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A new wave of U.S. derivatives trades are required to pass through central clearing houses starting on March 11. Clearing, exchanges and other swap market reforms were requirements of the Dodd-Frank Act, which became law in 2010. Prior to the law passing, most large banks already used central clearing to offset risks, but this new phase will require clearing for dealer-to-dealer trades. Transactions by most other large investors will also eventually need to be cleared.
Futures markets utilized exchanges and clearing prior to Dodd-Frank, so the law did not create strict new requirements for that market. Some of the rules and supervision requirements are more lenient than what is now required of swaps.

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