Risks that hold possibilities of financial collapse in various sectors around the world is a threatening thought. Obviously, it can never be ruled out since the contagions of crisis will remain enigmatic, unpredictable, and its origin, unknown until it’s too late. Despite the initiative to prevent incidents like the global financial depression of 2008, the Wall Street Reform and Consumer Protection Act or commonly referred as Dodd-Frank, the world is still subconsciously uneasy about a recession re occurring.
Derivatives are contracts agreed between two parties that indicate specific conditions under which payments are to be made between the parties involved. The most basic assets include commodities, bonds, stocks and other underlying derivatives which generate complexity to the proper valuation.
Risks, depending on its nature and scale, can make a financial institution collapse, the reason why Dodd Frank derivatives plays a vital role in the financial industry, capital market and economy in the general. Dodd Frank derivatives serve as protection against risks that come in various guises and help in managing hazards. It can also be said that Dodd Frank derivatives are decisive instruments used by companies in very state to guard themselves against risks that are associated to their businesses. Dodd Frank derivatives are not restricted to the financial aspect alone, branches of work including electrical utilize derivatives to hedge risks of various dangers tied to their field. To add, Dodd Frank derivatives allow financial institutions minimize their exposure to credit risks, which contributes in expanding their investment and lending capabilities.
Title VII of Dodd-Frank Wall Street Reform and Consumer Protection Act addresses the inconsistency in the United States financial regulation of OTC swaps by providing an extensive structure for the regulation of the OTC swaps markets. As mandated by Title VII, sufficiently liquid and regulated derivative transactions will be most likely subject to central clearing requirements, and many derivative transactions will be required to be executed on new electronic trading platforms, also known as Swap Execution Facilities (SEFs). Nonetheless, some Dodd Frank derivatives will still fall into the category of over-the-counter (OTC), meaning, terms and conditions are privately negotiated between two parties, and some remain uncleared. Some Dodd Frank derivatives that are subject to the new swap regime include interest rate swaps, credit default swaps, non-deliverable FX forwards (NDFs), swaptions and equity total return swaps.
Dodd-Frank Act established comprehensive, federal regulations, which have enormous effect on the market and its reforms, finally paying off. New regulatory provisions will affect swap dealers, swap participants, asset managers and other financial institutions. Dodd-Frank took several significant steps in continually improving transparency in the Dodd Frank derivatives market.