Dodd Frank Wall Street Reform Act Summary

Dodd-Frank Wall Street Reform Act
Title VII: Section 723
White Paper

By
Polina Khudaynatov

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 (OTC), creating challenges for the major players in today’s global market.
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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”) (Chan, 2011). The Act proposed changes to several areas of regulation, especially the trading of over-the-counter derivatives (OTC) (Amadeo, 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 OTC market (Chan, 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 OTC contracts (Dodd-Frank, 2012).
The reform mandates that contracts entered in after July 10, 2013 on certain types of OTCs, specifically credit default swaps and interest rate swaps, be cleared through a clearinghouse by a registered government regulated agency. The agency, or Central Counterparty (CCP), preforms pre-trade screening and ensures regulatory compliance of the contracts (Baris, 2013).
The CCP is also responsible for the reporting and recordkeeping 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 publically 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 (Paraskeva,