The International Swaps and Derivatives Association published an overview of milestones in connection with requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act that was enacted over five years ago last week. Among other things, the report highlighted that during the first half of 2015, 75 percent of the average daily notional volume of interest rate swaps and 78 percent of the average daily credit default swap index notional value was cleared. In addition, 55 percent of interest rate derivatives and 65 percent of CDS index average daily notional volumes are now executed on swap execution facilities. In addition, as a result of Dodd-Frank, all swaps transactions involving a US person are now required to be reported to a swap data repository, and large swap dealers are required to be registered with the Commodity Futures Trading Commission and are subject to strict business conduct standards. Going forward, says ISDA, there needs to be better global harmonization of national rules to avoid market fragmentation; more work needs to be done to ensure central counterparties are resilient; greater flexibility in execution methods should be introduced to the SEF regime; and standardized product and transaction identifiers and reporting formats must be adopted globally to help regulators gain a clearer picture of global risk exposure and concentrations, among other recommendations.
My View: Perhaps because I was very busy, somehow last week I missed the toasts and parties celebrating the five-year anniversary of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Many of the objectives of Dodd-Frank and the equivalent laws of many international jurisdictions regarding the handling of over-the-count derivatives transactions are laudable and addressed material weaknesses in the system that contributed to the 2008-9 financial crisis. However, the failure of international lawmakers and regulators to better coordinate their responses and to consider holistically the implication of their overly proscriptive laws and rules threatens to decrease and fragment market liquidity, ultimately hurting the ability of end users to effectively mitigate their risks. ISDA is an industry organization, acts for the self-interest of its members and, as a result, at least some lawmakers and regulators may be skeptical of its suggested areas of focus in its publication on Dodd-Frank released last week. However, if anything, ISDA’s recommended areas of focus are understated and are all topics that must be addressed to ensure the continued effectiveness of important markets and the viability of their participants.