Dodd-Frank Wall Street Reform Act: White Paper BY Pk33975n Dodd-Frank Wall Street Reform Act Title section 723 White Paper Poplin Southampton Executive Summary As a result of the Global Financial Crisis of 2008, Section 723 under Title VII of the Dodd-Frank Wall Street Reform Act has changed the trading procedures for certain over-the-counter derivatives (ETC), creating challenges for the major players in today’s global market.
As a leading financial advisory firm in New York City, BBC Consultants’ mission is to provide our clients with a competitive advantage through he guidance and support of our industry experts and advanced technological platforms. This white paper will outline BBC Consultants’ revolutionized turnkey solution for our clients’ advisory needs by giving them the knowledge and tools to help them make better informed business decisions.
BBC Consultants understand the complications associated with ETC investments, which is why our solution is specifically designed to address the risks and concerns towards changes in regulation and compliance. BBC Consultants goal is to strengthen our clients’ position in the rapidly changing market by helping them successfully overcome the halogens presented by political reform. Situation Given the condition of the global economy over the last few years, it is no surprise that political reform has played a major role in the structure of our financial system.
Specifically, the Global Financial Crisis of 2008 (the “Crisis”), which resulted in the worst recession in the United States since the Great Depression of 1929, triggered the enactment of the Dodd-Frank Wall Street Reform Act (the “Act”) (Chain, 2011). The Act proposed changes to several areas of regulation, especially the trading of over-the- counter derivatives (ETC) (Madame, 2013). Although there were many contributing factors to the Crisis, research has shown that one of the main causes was lack of oversight in the ETC market (Chain, 2011).
In an attempt to address these issues, Section 723 under Title VII of the Act introduced new provisions and practices for entering into certain ETC contracts (Dodd-Frank, 2012). Complication Unlike most stocks and bonds which are traded on an open exchange, ETC derivatives were privately negotiated and the details of the trades were not required to be reported to the public, making valuation of the contracts extremely complicated ND difficult to trade.
This lack of transparency and regulation in the ETC market Increased ten rolls AT entering Into ten contracts . I nee mall rolls Tanat was AT concern was the risk of default, or counterparts risk, the possibility that the other party entering the contract could fail to meet its payment obligation. Additionally, the high exposure to counterparts risk contributed to the systematic risk, or the risk of failure of one institution based on the collapse of another, in the market (“Bloomberg Joins,” 2012).
Answer The provisions of Section 723 of the Act attempt to address the risks in ETC trading. The reform mandates that contracts entered in after July 10, 2013 on certain types of Tots, specifically credit default swaps and interest rate swaps, be cleared through a clearinghouse by a registered government regulated agency. The agency, or Central Counterparts (ICP), performs pre-trade screening and ensures regulatory compliance of the contracts (Barbs, 2013).
The ICP is also responsible for the reporting and reconsidering of the new contracts for the major players, those who trade in high volume. The details of the transactions which include disclosure of notional values, interest rates and prices are reported to a data repository that is now biblically available information. The availability of this data and pricing information in real- time reduces risk by leading to greater price efficiencies as well as simultaneously creating liquidity and transparency in the previously unregulated swap market (Pervasive, 2013).
By using a ICP clearinghouse, who is equipped with the appropriate tools and procedures for mitigating risks, the counterparts and systematic risk exposure is shifted away from the major players and out of the market and transferred to the ICP. The ICP acts as a middleman between the two parties entering into the swap contract, Company A and Company B, and is therefore able to facilitate the very complex and risky trading of the financial instruments (see Visual 1). By serving as an intermediary, the ICP addresses counterparts risk by becoming the ultimate counterparts for both sides of the swap contract.
If for example, Company A is unable to pay Company B their obligation, the ICP will compensate the non-defaulting party for their portion of the contract (“Making Over,” 2010). As part of the Act’s risk mitigating strategy and in order to avoid mass default, Section 723 allows Cups to implement margin requirements for new contracts. Conservative initial margins address systematic risk by creating a cushion for payment obligations if the case of default of either party occurs, preventing the domino effect of failure of one institution due to the difficulties of one another (Dave’, 2010). Elution BBC Consultants understand how changes in political reform bring uncertainty to the market and our clients, especially since ETC investments make up a large portion of their investment portfolio. For this reason, BBC Consultants have revolutionized a runner solution to overcome these challenges, ABACAS. ABACAS is a unique platform that meets all your advisory needs. ABACAS is designed to import data from the biblically available repositories and customize them in a way that is unique to each client. Our clients will now have all the information they need in one place on an organized custom database.
ABACAS is also automated to electronically pull information from various financial market data sources, such as Bloomberg Professional and Reuters, allowing our clients to quickly search through particular sections of the Act and supporting sections, complete with links to relevant regulated materials (see Visual 2) Ayatollah, BBC/23 NAS a Adult In alerts system Tanat Issues automatically generated emails to our clients on any imperative changes of information that may require immediate decision making actions on a 2417 basis.
These functions of ABACAS will keep our clients informed and up to speed on all the new procedures and compliance requirements at all times, giving them an advantage over their competitors. To compliment this feature, ABACAS has an easily manageable Weber function that hosts secure conference calling as well as web-based training seminars on various trading procedures. ABACAS will also have a commentary section which will allow the constant flow of communication between us and our clients at any given moment (see Visual 3).
ABACAS is also intended to serve as a tool for internal financial analysis which has shown to lead to better informed business decisions. ABACAS has the capability use the biblically available information from ICP repositories to transfer the data onto your custom platform so that our clients an easily sort through active contracts and their specific details and margin requirements.
Based on this data, our clients are able to generate custom reports for our clients to easily compare their performance with that of their competitors or benchmark against the market, allowing them to visually assert the positions of their contracts adjust their hedging strategy accordingly (see Visual 4). Conclusion Although there is no such thing as a perfect financial structure, political reform is constantly trying to make the system better and BBC Consultants believe that Section 723 is setting a precedent for future trading practices.