On July 21st, the President signed the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Financial Reform”), which was passed by the U.S. Senate on July 15th and the U.S. House of Representatives on June 30th after weeks of reconciliation talks. The legislation covers a wide variety of topics in an effort to address the causes of the recent turmoil in the financial markets. Title VII of the Financial Reform is entitled the “Wall Street Transparency and Accountability Act of 2010” (the “Act”). The Act is the culmination of numerous Administration and legislative proposals for derivatives regulation that have been considered since the beginning of the 2008 financial crisis, including the collapse of Lehman Brothers and the meltdown of AIG, both of which thrust the $615 trillion over-the-counter (OTC) derivatives market into the media and legislative spotlight. As expected, the Act makes sweeping changes to the regulation of the OTC derivatives market.
The primary goals of derivatives reform were clearly delineated from the beginning of the regulatory overhaul effort: increasing pricing transparency and reducing systemic risk. The Act pursues these goals by encouraging and, in some cases, requiring derivatives to be traded on registered exchanges and cleared through registered central counterparties and by imposing margin and capital requirements on derivatives. For a summary of the Act, please click here.