Title VII: Derivatives (Wall Street Transparency and Accountability Act of 2010)

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Summary:

- Regulates the previously unregulated, over-the-counter (OTC) derivatives market

- Requires registration of swap dealers, major swap participants, swap data repositories and swap execution facilities

- Mandates central clearing and trading of swaps

- Establishes margin and capital requirements for swaps

- Mandates reporting, recordkeeping and business conduct standards

- Mandates position limits, public reporting and large trader reporting

- Prohibits federal assistance for regulated swap dealers and traders, which may require some financial institutions to restructure their derivatives-dealing activities to "push-out" certain OTC derivatives-trading activity to separately capitalized, affiliated companies

For ease of reference, unless otherwise noted, this summary uses the term “swap” to mean both swaps and securitybased swaps (and, by extension, “swap dealer” also means a security-based swap dealer, and “major swap participant” means a major security-based swap participant). Similarly, “regulator” means the CFTC with respect to swaps, and the SEC with respect to security-based swaps (abbreviated in paragraph headings as “sbs”).

Effective Date (sections 754 for swaps; 774 for sbs)

Unless otherwise noted below, these provisions take effect on the later of 360 days after the date of enactment (July 15, 2011, as President Obama signed Dodd-Frank Act on July 21, 2010) or, to the extent a rulemaking is required for a specific provision, then it will become effective no less than 60 days after publication of the applicable final rule or regulation.

Regulation of Swaps (sections 721 for swaps; 761 for sbs)

The regulatory architecture of Title VII rests upon the regulation of “swaps” and “security-based swaps,” two new terms defined by the legislation in an extremely broad manner. In common-market parlance, a “swap” is any OTC forward, swap or option on an underlying or reference instrument that is not an individual security or loan, or an index with less than 10 component securities or loans (a “narrow-based security index).

In other words, OTC currency, qualifying index-The primary categories of security-based swaps are OTC equity and credit derivatives that reference a single security or loan or any OTC derivative that references a narrow-based security index.

Title VII contains a few notable exclusions and exceptions from this broad definition. First, the Treasury Secretary has the authority to exempt foreign exchange (FX) forwards and FX swaps from the regulatory requirements of Title VII (other than reporting and business conduct requirements).

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