Dodd-Frank Wall Street Reform Act
Title VII: Section 723
As a result of the Global Financial Crisis of 2008, Section 723 under Title VII of the Dodd-Frank Wall Street Reform Act has changed the trading procedures for certain over-the-counter derivatives (OTC), creating challenges for the major players in today’s global market. As a leading financial advisory firm in New York City, ABC Consultants’ mission is to provide our clients with a competitive advantage through the guidance and support of our industry experts and advanced technological platforms. This white paper will outline ABC Consultants’ revolutionized turnkey solution for our clients’ advisory needs by giving them the knowledge and tools to help them make better informed business decisions. ABC Consultants understand the complications associated with OTC investments, which is why our solution is specifically designed to address the risks and concerns towards changes in regulation and compliance. ABC Consultants goal is to strengthen our clients’ position in the rapidly changing market by helping them successfully overcome the challenges presented by political reform.
Given the condition of the global economy over the last few years, it is no surprise that political reform has played a major role in the structure of our financial system. Specifically, the Global Financial Crisis of 2008 (the “Crisis”), which resulted in the worst recession in the United States since the Great Depression of 1929, triggered the enactment of the Dodd-Frank Wall Street Reform Act (the “Act”) (Chan, 2011). The Act proposed changes to several areas of regulation, especially the trading of over-the-counter derivatives (OTC) (Amadeo, 2013). Although there were many contributing factors to the Crisis, research has shown that one of the main causes was lack of oversight in the OTC market (Chan, 2011). In an attempt to address these issues, Section 723 under Title VII of the Act introduced new provisions and practices for entering into certain OTC contracts (Dodd-Frank, 2012). Complication
Unlike most stocks and bonds which are traded on an open exchange, OTC derivatives were privately negotiated and the details of the trades were not required to be reported to the public, making valuation of the contracts extremely complicated and difficult to trade. This lack of transparency and regulation in the OTC market increased the risk of entering into the contracts. The main risk that was of concern was the risk of default, or counterparty risk, the possibility that the other party entering the contract could fail to meet its payment obligation. Additionally, the high exposure to counterparty risk contributed to the systematic risk, or the risk of failure of one institution based on the collapse of another, in the market (“Bloomberg joins,” 2012). Answer
The provisions of Section 723 of the Act attempt to address the risks in OTC trading. The reform mandates that contracts entered in after July 10, 2013 on certain types of OTCs, specifically credit default swaps and interest rate swaps, be cleared through a clearinghouse by a registered government regulated agency. The agency, or Central Counterparty (CCP), preforms pre-trade screening and ensures regulatory compliance of the contracts (Baris, 2013). The CCP is also responsible for the reporting and recordkeeping of the new contracts for the major players, those who trade in high volume. The details of the transactions which include disclosure of notional values, interest rates and prices are reported to a data repository that is now publically available information. The availability of this data and pricing information in real-time reduces risk by leading to greater price efficiencies as well as simultaneously creating liquidity and transparency in the previously unregulated swap market (Paraskeva, 2013). By using a CCP clearinghouse, who is equipped with the...
References: Amadeo, K. (2013). Dodd-Frank Wall Street Reform Act. US Economy Guide. Retrieved July 7, 2013, from
Chan, S. (2011, January 25). Financial Crisis was avoidable, inquiry finds. The New York Times. Retrieved July 5, 2013, from http://www.nytimes.com/2011/01/26/business/economy/26inquiry.html?_r=2&
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