New OTC derivatives regulation and the future of the derivatives industry

Abstract

The Over-the-Counter (OTC) derivatives market is entering an uncertain future with regulators on both sides of the Atlantic developing new regulations to reform this market in response to the direction from the G20 Summit in Pittsburgh in 2009.New regulation of the OTC derivatives markets in the USA has now become law: after President Obama put his signature on the ‘Dodd-Frank Wall Street Reform and Consumer Protection Act’ (the Act) that runs to over 2,000 pages. Meanwhile, the European Commission has published its new regulation on OTC derivatives, central counterparties and trade repositories, with likely changes to come on existing legislation to cover other aspects of the market including derivatives trading, capital requirements etc.Proponents applaud these new measures and rules as they will improve the robustness and efficiency of this market. It will create transparency and much needed confidence in these markets. Others, however, question the long-term future of the OTC derivatives markets. They worry that the coming measures could actually exacerbate risk and will substantially increase costs, most notably to end-users of OTC derivatives, including pension funds, with direct consequences for pensioners.Banks and other derivatives market participants are now considering how their business will be affected by the new derivatives rules. This paper will describe the regulations proposed so far in the USA and EU. It endeavours to assess how they will most likely impact the derivatives industry and its markets in general, and the various parties involved in particular.