Reform and Regulation of Derivative Transactions

by Latham & Watkins LLP

Peter Malyshev is counsel at Latham & Watkins where he focuses his practice on regulatory, compliance and transactional issues relating to commodities, securities and derivatives products markets.

Latham has registered several Swap Execution Facilities (SEFs) to date and advises regarding SEF trading market participants, which range from large banks, commodities and derivatives traders, and equity funds to non-financial institutions and commercial hedgers.

“The effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act was profound,” said Malyshev. “Before these reforms, the derivative swaps market was over the counter. Now the entire market, which is in the trillions of dollars, is regulated.”

How is the market coping with the transition to regulated derivative transactions?

Malyshev: In 2010, the Dodd-Frank Act became effective. The Act ensures that standardized derivatives trade on either designated contract markets, such as exchanges, or on SEFs. For the past three or four years, derivatives trading facilities — which were mostly unregistered — went through the process of registration and are now operational in the US markets as SEFs. There are about 20 or so of these facilities. The challenge for the market is to bridge the gap between over-the-counter trading in derivatives and the new regulated format.

This is particularly relevant in the context of clearable contracts, such as interest rate swaps and credit default swaps as well as other contacts that the Commodity Futures Trading Commission (CFTC) will designate as clearable in the future. We expect that by the end of 2014, foreign exchange contracts, most standardized precious metals contracts and energy contracts will be designated as clearable. If a contract is clearable, you must trade it on a SEF by law; it is illegal to trade them off of these facilities.

The SEFs themselves must figure out how to comply with these requirements and what they need to do to remain registered with the CFTC. And numerous market participants which, before these facilities became available, were trading in an unregulated market now need to trade swaps and hedge their exposure on the regulated markets, such as SEFs.

What are the biggest challenges facing the industry over the next six to 12 months?

Malyshev: There are so many issues, that they touch upon almost every rule promulgated by the CFTC in the past several years. This year market participants will focus on the implementation, and the CFTC will start ramping up their enforcement efforts as well — we are already seeing some of this taking place. 

Among other things, I think that anything related to SEFs is up for debate because the industry is looking at ways to implement these regulations to comply and to ensure that they continue their business operations within the framework and the timeframe that the CFTC has provided. And that’s a huge challenge.

In addition to SEFs, one of the big areas of concern in 2014 is position limits because that is something that every participant in commodities and derivatives should be aware of. The rules are not final yet, but they will be soon.

Other challenges include the completion of the required documentation, including master agreements, etc. And bringing the end-user community, which is not accustomed to being regulated, into the regulated space.

Reporting, of course, will continue to be a developing area as well as CFTC’s cross-border rules and harmonization of its regulations with the international regulators.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Latham & Watkins LLP | Attorney Advertising

Written by:

Latham & Watkins LLP

Latham & Watkins LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.