Financial regulation in the United States

The Dodd Frank Wall Street Reform and Consumer Protection Act (DFA) came into force on 21 July 2010. It made changes to the American financial regulatory environment that affected all federal financial regulatory agencies and almost every part of the nation's financial services industry.

Introduction to Dodd-Frank Derivative Market Reform

The Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) was enacted to reduce systemic risk, increase transparency, and promote market integrity within the financial system. In particular, Title VII mandates major structural reform to the Over-The-Counter (OTC) derivatives market. Title VI introduces changes to Bank Holding Company (BHC) regulation. The key areas of change in this area include the following:

  • Increased transparency
  • Enhanced risk management
  • Mandatory execution and clearing of covered products
  • Market integrity
  • Customer and counterparty protection

Title VII of the Dodd-Frank Act

Since the second half of 2012, swap market participants have experienced an unprecedented introduction of new regulatory requirements. Of particular note are those subject to the jurisdiction of the Commodities Futures Trading Commission (CFTC). These new CFTC requirements include:

  • Registration of Swap Dealers and Key Market Participants
  • Swap Data Reporting (including publicly available Real Time Reporting)
  • Clearing Mandate and the phase-in over 270 days during 2013 of certain classes of Interest Rate and Credit Default Swaps covered by the rule
  • Industry-wide documentation requirements between Swap Dealers and their clients to conform with Internal and External Business Conduct Standards
  • Introduction of Confirmation Timeliness Requirements for market participants
  • Introduction of Portfolio Compression and Reconciliation requirements
  • Registration of Swap Execution Facilities (SEFs) and corresponding membership process by market participants in preparation for the Execution Mandate
  • Implementation of the CFTC's Cross Border Guidance and changing definition of scope of market participants considered within the scope of the regulation
  • Commencement of the phase-in of mandatory SEF execution for products deemed Made Available to Trade (MAT)

2013 closed with the CFTC's issuance of Substituted Compliance determinations for the six major jurisdictions (Europe, Hong Kong, Japan, Canada, Australia, and Switzerland). The pipeline for 2014 is equally as aggressive as the final set of CFTC rules, including Segregation of Initial Margin rules, comes into effect. We also expect the Securities Exchange Commission (SEC) to release its rules on how Title VII applies to the security-based swaps market. The SEC rules will likely apply many of the same entity and transactional level rules that currently apply to CFTC regulated swaps to security-based swaps.

NB: The Dodd-Frank rules apply to all clients dealing with US swap dealers such as HBUS. Generally, clients trading with non-US swap dealers such as HBEU are only impacted by Dodd-Frank if the client is considered a ‘US Person’. Non-US Persons that benefit from a US Person swap guarantee and ‘affiliate conduits’ may also be subject to certain Dodd-Frank transaction-level requirements.

Broad Interpretation of the Term ‘US Person’

Under the final Guidance, the CFTC’s interpretation of the term ‘US person’ would generally encompass: (1) persons (or classes of persons) located within the United States; and (2) entities that may be domiciled in the United States or entities that operate outside the United States with swap activities that have a "direct and significant connection with activities in, or effect on, commerce of the United States."

This definition is somewhat wide-ranging and clients are advised to pay close attention to the various interpretations of this definition in the rules.

For a detailed breakdown of what Dodd-Frank deems a ‘US Person’ to be, please see pages 11 to 13 of the CTFC’s Chapter I, Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations; Rule’, dated 26 July 2013.

Protecting the customer

The Dodd Frank External Business Conduct rules have been designed to protect customers throughout the transaction life cycle. In particular, they are intended to educate the customer on trade risks through the delivery of critical pre-trade information, for example, material risks, conflicts disclosures and trade characteristics. In addition, they provide protection to customers from fraudulent, deceptive and manipulative practices.

Please see the ‘Business Conduct’ tab of our Dodd-Frank round-up for further information.

Improving ‘Know-Your-Customer’ and Trading Procedures

In order to trade derivatives products, HSBC must adhere to high-level Know Your Customer (KYC) standards and uphold strict rules for trading relationship documentation, the timely confirmation of trades and the reconciliation of portfolios.

HSBC has adopted a proactive approach to financial regulation compliance and KYC observance.

The Final Rules Regarding Business Conduct Standards for Swap Dealers and Major Swap Participants Dealing with Counterparties can be viewed on the CFTC website.


Last updated: 16 September 2019