Swap Trading in the New Regulatory World

As a result of the Dodd-Frank Act, the over-the-counter derivatives markets have become subject to significant new regulatory oversight. As the markets respond to these new regulations, the menu of derivatives instruments available to asset managers, and the costs associated with those instruments, will change significantly. As the first new swap rules have come into effect in the past several months, market participants have started to identify risks and costs, as well as new opportunities, arising from this new regulatory landscape.

This memorandum and the accompanying timeline is designed to provide asset managers, and those interested in the activities of asset managers, with background information on key aspects of the swap regulatory regime that may impact their derivatives trading activities. The memorandum highlights practical considerations and potential opportunities for asset managers, as they assess the impact these regulations will have on their trading activities.

In the short term, asset managers should be sure to:

• Assess trading risks and opportunities arising from publicly available swap price, volume and other transaction data;
• Identify “active fund” clients and “third-party subaccount” clients to determine whether clearing for IRS and CDS must begin in March, June or September;
• Negotiate clearing arrangements with primary and backup FCMs and choose clearinghouses in advance of clearing deadlines;
• Start active dialogue with clients about new information and documentation that will be needed; – Adhere to ISDA Protocol 1.0 or negotiate a bilateral alternative with swap dealers by May 1;
• Classify products traded as swaps, security-based swaps, mixed swaps or as outside the new derivatives regulatory regime;
• Determine U.S. person status of clients and assess potential advantages of reorganizing trading structure; and
• Collect information and calculate trading thresholds for MSP and CPO registration requirements.