In the US and Europe’s world of finance, over-the-counter (OTC) derivatives play a significantly important part. In this market, less than standard products are traded between 2 parties (bilaterally). The over-the counter derivatives markets are huge; they have grown to a wide extent over the last 20 years. This growth was due to foreign exchange instruments, interest rate products, and credit default swaps. The OTC derivatives market is a network of credit exposures the distribution and size of which are tied to market assets.

However, with the credit crisis being experienced by the global finance, many people have seen the OTC derivatives as primary player. One reason given was that it does not have the backing of clearing houses’ credit worthiness, unlike the listed standard products. Another reason was the associated lack of transparency in these instruments. So, to keep the OTC derivatives market safe in the aftermath of the crisis, the Dodd-Frank Wall Street Reform And Consumer Protection Act was signed into law by US President Obama in 2010. Other goals of the mandate are to improve transparency, reduce systemic risks, maintain market integrity, and ensure stability of clients for the trading of over-the-counter derivatives.

The clearing mandate is yet to be implemented. There were years of missed deadlines and changed schedules. But finally, several rules for compliance have been published by the CFTC (Commodity Futures Trading Commission), and the clock is set ticking. Connectivity protocols and important documentations have also been release by industry groups for the purpose of easing the transition of derivatives market to centralized clearing.

The full implementation of the over-the-counter derivatives clearing was set by CFTC at the end of the year. However, many are skeptical that this will be met. For the past year and a half, people had witnessed 2 extensions for deadlines by the CFTC. But they are very hopeful. On August 13, the CFTC had published in the Federal register the product definitions. Major swap participants and swap dealers must register formally with the regulators. The product definition also require that participants organize their swap-trading business. This should be done within 90 days.

It should be noted that while many over-the-counter derivatives major dealers are members already of a central clearing party, still a majority of clients need to have a relationship with clearing service providers. Now that the regulatory definitions have been hammered out, dealers and buysiders are somehow relieved. They have been lamenting for years for being unable to take steps to prepare for clearing, other than wait for the full implementation of the mandate.

There are some criticisms to putting the derivatives to centralized clearing however. A few people maintain that requiring all derivatives to be cleared may prompt the banks to create lending facilities for special purposes to allow businesses afford to meet their calls for collateral. This scenario may not be the most ideal for most businesses, because they will have uncertain interest and draws expense. Whatever drawback people may find in the Dodd-Frank Act, hopefully its implementation will not meet any barrier anymore and participants who have been waiting for this will get the relief they need.
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