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Unpublished Paper
OTC Derivatives Trading Under the Financial Reform Bill: Is It Tough Enough?
ExpressO (2010)
  • Willa E Gibson, University of Akron School of Law
Abstract

This paper discusses the regulatory framework devised by Congress to govern trading in OTC derivatives products with a goal toward assessing the efficiency of the legislation to prevent systemic loss in the financial markets from derivatives trading. Both the U.S. House of Representatives and the U.S. Senate have drafted financial reform legislation prompted by the financial market failings the country experienced in 2008. Both versions provide for comprehensive regulation of the OTC derivatives products, which were used extensively by those financial institutions that lost millions of dollars from investments in mortgage securities to insure against subprime mortgage defaults. This paper discusses the efficiency of proposed Congressional legislation to regulate the Over-the-Counter (OTC) derivatives market in light of the provision in the legislation that effectively exempts customized OTC derivatives contracts from clearing requirements and exchange trading. The exemption allows OTC derivatives dealers trading customized contracts to continue trading in the same opaque markets in which they engaged in rent seeking behavior that almost led to the collapse of the financial markets. The manuscript discusses why Congress has proposed these exemptions, why the exemption creates economic inefficiencies, and calls for Congress to devise a definition for customized OTC derivatives contracts to narrow the definition of what constitutes a customized trade to ensure that OTC derivatives dealers are not allowed to intentionally craft their OTC derivatives contract to avoid clearing and exchanged trading requirements.

Keywords
  • credit default swaps,
  • swaps,
  • OTC derivatives,
  • AIG,
  • efficiency,
  • regulation of OTC derivatives,
  • financial reform bill,
  • wall street reform act,
  • price transparency,
  • clearinghouses,
  • clearing,
  • margin requirements,
  • capital requirements,
  • derivatives dealers,
  • legislation,
  • financial market collapse,
  • subprime mortgages,
  • mortgage insurance,
  • mortgage securities,
  • SEC,
  • CFTC,
  • customized OTC derivatives contracts,
  • exchange trading,
  • opaque markets,
  • voice brokering,
  • overhaul financial regulation,
  • financial regulation
Disciplines
Publication Date
March 31, 2010
Citation Information
Willa E Gibson. "OTC Derivatives Trading Under the Financial Reform Bill: Is It Tough Enough?" ExpressO (2010)
Available at: http://works.bepress.com/willa_gibson/10/