Understanding the Dodd-Frank Act
The Dodd-Frank Act, passed by the US Congress in 2010, is arguably one of the most significant financial regulation overhauls since the 1930s. It is formally known as the Dodd-Frank Wall Street Reform and Consumer Protection Act. It was introduced as a response to the financial crash that took place in 2008. The Act was designed to cover many financial areas, but in essence was aimed at helping to prevent such a crisis from happening again in the US.
The Act covers a number of different rules for banks, derivatives and hedge funds within its extensive 2000 page document. It makes alterations to American financial regulations, affecting federal financial regulatory agencies and the majority of America’s financial services industry. In addition the Consumer Financial Protection Bureau (http://www.consumerfinance.gov/) was also set up by the Act in order to shield retail users of banking products.
As part of these changes to financial regulation, a new section was added to the Commodity Exchange Act (CEA) affecting Swap Dealers (SDs) and Major Swap Participants (MSPs). The section under the CEA was given the title of Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation, Requirements for Swap Dealers and Major Swap Participants. The section essentially requires SDs and MSPs to follow the standards given by the Commission in regards to the confirmation, netting, processing, documentation and valuation of swaps.
In regards to changes in swaps confirmations, the Act has made it obligatory for all parties to send an acknowledgement instead of a confirmation when a swap is made between the two counterparties. However, when it comes to Swaps Portfolio Reconciliation, SDs and MSPs must engage in portfolio reconciliation with respect to swap transactions. Portfolio reconciliations require counterparties to agree to the terms of the reconciliation in writing, and to reconcile swap portfolios with other SDs or MSPs on a fixed schedule.