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Global Regulations Bring Dramatic Changes for OTC Derivatives

Dodd-Frank regulations bring new compliance requirements

The abundance of regulations coming from American and European lawmakers is enough to make a CFO's head spin. The Dodd-Frank Wall Street Reform and Consumer Protection Act calls for some of the most "sweeping changes" the over-the-counter (OTC) derivatives market has ever seen, The Financial Times reports.

As regulators roll out the rules of Dodd-Frank, the market can expect to see "standardized" OTC derivatives - such as interest rate swaps - processed in clearing houses and moved from their current positions to "swap execution facilities" and exchanges, the news source reports.

On the other side of the Atlantic, legislators are also establishing new rules for the OTC market. The European Market Infrastructure Regulation is addressing clearing and the European Commission is taking on OTC trading, which the FT reports could hit financial instruments directive markets by October.

Exchanges, clearing houses and inter-dealer brokers will also have to cope with the changes as financial organizations and tech companies work to incorporate the software and hardware necessary to comply with regulations.

The massive changes would also make collateral requirements an important factor for OTC derivatives. After the U.S. and European laws go into effect, "when a derivative contract is centrally cleared that previously would have been OTC, both sides of the trade will have to meet the stringent collateral requirements imposed by the central counterparty," the news outlet notes.