Swap futurization. Levelling the playing field
| Published date | 06 May 2014 |
| Pages | 147-158 |
| Date | 06 May 2014 |
| DOI | https://doi.org/10.1108/JFRC-06-2013-0018 |
| Author | Lisa Smack |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
Swap futurization
Levelling the playing eld
Lisa Smack
School of Law, University of Reading, Reading, UK
Abstract
Purpose – The purpose of this paper is to demonstrate that certain rules, implemented as a result of the
Dodd-Frank Act (DFA) of 2010, should be harmonized between economically equivalent products in
swap and futures markets to prevent regulatory arbitrage.
Design/methodology/approach – The paper focuses on rules surrounding margin requirements
and block size thresholds. As such, a background of clearing and exchange systems is presented to
familiarize the reader with the risk management objectives of the regulation. Viewpoints of several
leading commentators taken from a Commodity Futures Trading Commission roundtable and
comment letters are then analysed to support the argument that margin requirements and block size
thresholds should be the same for similar nancial products.
Findings – Based on the review and analysis of several commentators and industry participants,
harmonization of rules for swaps and economically equivalent futures contract should be achieved to
prevent regulatory arbitrage.
Originality/value – To the best of the author’s knowledge, there are no articles that address the swap
futurization debate in this detail. This paper will be of interest to readers who would like to learn more
about how the DFA has impacted the derivatives market leading to the recent trend of swap
“futurization”. It is also ideal for those who are unfamiliar with current clearing and exchange systems,
as it presents background detail of this framework to supplement the debate on swap rules.
Keywords Dodd-Frank Act, Futures, Swaps, Swap futures, Derivatives policy, Derivatives market,
Futurization, Margins, Block size, CFTC rules
Paper type Viewpoint
Following the nancial crisis of 2007-2008, increased regulatory scrutiny was placed on
the over-the-counter (OTC) derivatives market. The US government bail-out of
insurance giant AIG now serves as the classic example of how OTC derivatives
(particularly, credit default swaps) contributed to systemic risk in the nancial system.
Because of the inherent risks of nancial swaps, most notably counterparty risk and the
lack of transparency in the markets, regulatory reform of the swaps market was
incorporated into Title VII of the Dodd – Frank Wall Street Reform and Consumer
Protection Act (“DFA”) enacted in July 2010.
Section 712 of the Dodd-Frank Act (DFA) created parallel regulatory regimes, giving
rulemaking and enforcement authorities to the Commodity Futures Trading
Commission (“CFTC”) for swaps and the Securities Exchange Commission for
security-based swaps (swaps based on single-name securities and narrow-based
securities indices; Gibson, 2010). According to the CFTC:
The author would like to acknowledge Jorge Guira, Esq., for his guidance and support in writing
this essay.
JEL classication –K2
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
Swap
futurization
147
Journal of Financial Regulation and
Compliance
Vol. 22 No. 2, 2014
pp. 147-158
© Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-06-2013-0018
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