Document Type

Article

Publication Date

2013

Keywords

derivatives, clearing, clearinghouse ownership, fair and open access to clearing

Comments

This paper was originally presented at Fordham Law School on February 13, 2012 as part of a symposium on Regulation of Over-the-Counter Derivatives (http://law2.fordham.edu/ihtml/cal-2uwcp-calendar_viewitem.ihtml?idc=12556) sponsored by the Fordham Corporate Law Center.

Abstract

Implementing the rigorous governance and ownership standards established in the Dodd-Frank Wall Street Reform and Consumer Protection Act3 for derivatives clearing organizations (DCOs) will promote free and open access to clearing and reduce systemic risk within what is now the $700 trillion notional value derivatives market. Such standards are central to and advance the key regulatory tenants of Dodd-Frank: i.e., to restore transparency, capital adequacy, and accountability to what was the unregulated over-the-counter (OTC) derivatives market by ensuring that swaps are cleared through financially sound DCOs. Also, these rules will promote competition by curtailing large swap dealers‘ (SDs) control over these markets to the disadvantage of swaps users.

This article focuses on the importance of swaps clearing to Dodd-Frank-mandated market reforms and the need for fair and open access to that clearing. Specifically, it shows that implementing objective governance standards for DCOs that include maximum capital requirements for DCO membership will enhance market stability and efficiency. To this end, the article focuses exclusively on clearing as it lies at the heart of Dodd Frank market reforms. Also, although the article discusses the SEC‘s proposed rules on DCO governance and ownership, it primarily focuses on the CFTC‘s rulemaking for DCOs since the CFTC has jurisdiction over 85% of the derivatives market.

The article is divided into four parts. First, it shows that Congress intended the CFTC to adopt rigorous rules regarding DCO governance and ownership that eliminate the conflicts of interest that have allowed SDs to stifle competition for clearing services and to charge unnecessarily high transaction fees. Second, it explains how pre-Dodd-Frank market forces have limited access to clearing. Third, it shows that the CFTC‘s final rule on participant eligibility—particularly the rule establishing a $50 million threshold for DCO membership—promises to both improve swap users‘ access to clearing and ensure greater stability within the derivatives clearing market. Finally, the article argues that the CFTC should strengthen its proposed governance standards for DCOs in order to safeguard swap users‘ access to clearing against the possibility that the CFTC‘s participant eligibility requirements fail to increase DCO membership.

Publication Citation

18 Fordham Journal of Corporate and Financial Law 245 (2013).

Disciplines

Banking and Finance Law | Securities Law

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