OTC-Cleared Derivatives: Benefits, Costs, and Implications of the 'Dodd-Frank Wall Street Reform and Consumer Protection Act'
27 Pages Posted: 24 Nov 2015
Date Written: November 19, 2015
Derivatives that are negotiated over-the-counter (OTC), but cleared and settled through central counterparties have grown in popularity since their first appearance in the 1990s. Such “OTC-cleared” derivatives have both benefits and costs that can vary significantly across market participants and product types. This article explores the evolution of OTC-cleared derivatives and those benefits and costs. Particular attention is paid to the regulatory framework for OTC derivatives, which was recently substantially overhauled with the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the new Act, the clearing and settlement of many OTC derivatives through a central counterparty (CCP) is now mandatory. The challenges and risks likely to arise from these new regulations are also explored here for clearinghouses, swap dealers, and major users of OTC derivatives.
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