Posts Tagged ‘regulation’

Regulators to Issue Corporate Margin Requirements Soon

Wednesday, July 2nd, 2014
Regulators to Issue Corporate Margin Requirements Soon
By John Hintze
June 23, 2014
*Registration may be required

“In the meantime, talk is circulating that the long dormant regulatory proposal’s revival may be imminent. Luke Zubrod, a director at Chatham Financial, said US regulators will likely change the proposal to resemble more closely the recommendations issued by the Working Group on Margin Requirements (WGMR), which was formed in 2011 by the Basel Committee on Banking Supervision (BCBS) and the International Organizations of Securities Commissions (IOSCO). For example, US regulators proposed separate margin requirements for high-risk and low-risk financial end users, whereas the WGMR recommended only one.”
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Perpetual Extraterritorial Trading or: How I Learned to Stop Worrying and Love Market Regulation

Monday, June 23rd, 2014

The Chatham Onion (a.k.a., Chonion)

NEW YORK, N.Y. – Peter Beyers and Stanley Sellers, two former Wall-Street derivative’s traders, are leading a group of financial professionals in a quest to create a derivatives trading system completely untethered from financial regulation. The idea is to establish human and technological infrastructure robust enough to support a legitimate presence in the derivatives market that operates apart from any regulatory scheme. “Navigating the do’s and don’ts of the new and existing regulation across the world is becoming increasingly difficult and burdensome for market participants,” said Mr. Beyers. “Imagine the efficiencies you could create by cutting away all the red tape.”

But finding a way to stay out of reach of regulation while still maintaining a presence in derivatives markets creates a unique challenge. “The regulatory landscape in today’s world is changing,” Beyers explained. “All of the major markets exist in geographies that have either implemented, or are developing regulatory frameworks governing derivatives. We found that we couldn’t think laterally in terms of location, we had to think vertically.”

So Beyers and Sellers formulated a plan, which they call Perpetual Extraterritorial Trading, or PET. The idea is to retrofit Cold War Era B-52 bombers with computing and wireless connectivity technology to create mobile trading desks. These aircraft would be kept in the air 24 hours a day, 365 days a year, circling in international airspace, thereby operating outside the jurisdiction of any existing regulatory body.

The idea for Perpetual Extraterritorial Trading, referred to unofficially by those involved as Operation Dodge-Frank, came from an unlikely source. Sellers explains, “Peter and I were talking favorite films. We got on the subject of Dr. Strangelove, where the US maintains a fleet of continuously airborne B-52 bombers never more than 2 hours from their Soviet targets. All of a sudden a light-bulb went off: rather than racing to the jurisdiction with the least constrictive regulation, why not put the swap desks where there is no jurisdiction?” And with that, Perpetual Extraterritorial Trading was born.

Financial markets have seen a considerable uptick in regulation following the economic crisis of 2008. The two largest bodies of legislation came in the form of Dodd-Frank in 2010 for the US and EMIR in 2012 for European markets. Other markets, including various Asian countries and Canada, are nearing completion of regulatory overhauls of their own. Beyers and Sellers admit that they recognize the positive role oversight plays in avoiding a repeat of 2008, but they worry that new legislation is often unclear, unfair, and at times, overreaching. While their goal may be total escape from regulation, they point to a few issues in particular as animating motivation behind PET:

Margin requirements. The G-20 met in 2011 to harmonize a globalized approach to margin requirements for derivatives. Following this meeting, the Basel/IOSCO led Working Group on Margining Requirements (WGMR) created an agreement finalized in September 2013 that regulators in many jurisdictions are beginning to implement to varying degrees. However, inconsistency across, and even within, jurisdictions is a cause for concern for many market participants, especially multi-national entities. For example, the WGMR proposed, and the EU tentatively affirmed, that margin requirements would not apply to Non-Financial Entities. The US, however, has been reluctant to offer this same comfort. In fact, while the CFTC embraced this approach and proposed to exempt end users from margin requirements, the Federal Reserve and the other bank regulators have taken a different position and proposed imposing margin requirements on end users when exposures exceed bank-set thresholds. And although European end users will likely be exempt from margin requirements under EU regulations, EU regulators have proposed applying margin requirements to trades between non-EU end users and EU banks. Ongoing crystallization of legislative and regulatory processes could lead to further clarity along any of these lines, but there is still more than enough uncertainty surrounding the issue of margin to keep end users on their toes.

Extraterritoriality. In July 2013, the CFTC added footnote 513 to its cross-border guidance, indicating that swap transactions originated by non-US Swap Dealers would be subject to US swaps rules if they involved US staff in the transaction. This was not welcomed by swap dealers, who consequently found themselves subject to Dodd-Frank and foreign regulation simultaneously. Despite the US determination, uncertainty clouds the future of cross-border derivatives regulation. The US and EU continue to negotiate cross-border regulatory approaches, with the EU looking to resolve concerns about the expansive reach of US law via a transatlantic trade agreement. Meanwhile, banks have sued, charging that the CFTC’s cross-border approach did not go through proper channels. Thus, companies transacting across borders are left sorting through parallel rules, and often needing to comply with the rules of multiple jurisdictions, at least for the time being.

These are just two of the many issues created by a world-wide ramping up of regulatory reform that the creators of Operation Dodge-Frank are looking to avoid. While they may be ambitious, the two men are not blind to the project’s shortcomings. On the challenge of sourcing and maintaining his aerial fleet, Beyers admits; “It’s a logistical nightmare.” Airworthy B-52s are relatively scarce and finding one for sale has proven near impossible. On the other hand, while Beyers originally feared he would not be able to staff his project, he was ultimately surprised: “It was far easier than I anticipated to find financial professionals willing to work long hours away from home under highly stressful conditions. Who knew?”

Perhaps more importantly, the two men acknowledge a fundamental flaw in the PET system: “You can remove yourself from every regulation under the sun,” Sellers explained. “But as long as your counterparty is subject to regulation, you can never truly escape the reach and ramifications.” His solution? “We hope to encourage others to follow suit. We envision a world where airborne armadas of PET entities transact with each other in a truly regulation-free environment. That is the purity of essence that we are striving for.”

When asked about their biggest fear moving forward with Dodge-Frank, the two men answered candidly; “Crash and burn,” Beyers said. “What we are doing has never been done, and it is not without risk. Quite literally, this could all go down in flames if the hardware malfunctions. But there’s also the figurative crash and burn. Insulating yourself from rules that are fundamentally designed to protect markets is a dangerous move. What we’re doing is not for the faint of heart, we have no illusions about that. Some people say we’re nuts; we’re not saying they’re wrong.”

Beyers and Sellers estimate the roll-out date for Perpetual Extraterritorial Trading under the most optimistic circumstances to be no sooner than July of 2016. “We have our work cut out for us and a lot will have changed between now and then, but we are confident that the market for our service will only continue to grow. After all, the sky’s the limit,” said Beyers. “Our best advice,” he continued, “is that rather than waiting for the tide of regulation to turn in your favor or looking for ways to avoid regulation, make sure you have a strong expert and advocate like Chatham in your corner to help you comply and prepare for what is coming down the pipeline. The better you understand the requirements, the better prepared you will be to adapt in an ever-changing market place.”

“And if anyone out there has a B-52 for sale,” Sellers added, “please let us know.”

If you would like to discuss how current and future regulatory requirements may affect you and your hedging strategy, give us a call at 610.925.3120 or email us.

Mar. 20: EMIR Compliance: Finding a Clear Path Forward

Thursday, March 6th, 2014
EMIR Compliance: Finding a Clear Path Forward
March 20, 2014 – 2PM GMT / 3PM CET / 10AM EDT | Recording Available


If you have not been given a password, please request one by emailing or by contacting your Chatham advisor. A password will be provided within 24 hours or next business day.

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To help affected end users and their advisors understand EMIR Risk Mitigation and Trade Reporting obligations and take action to address them, Chatham Financial is pleased to present this webinar in which we explain the current EMIR requirements and their impact on you; your alternatives to address these requirements; and ways to evaluate these alternatives.


European hedging entities have been required to comply with certain Risk Mitigation obligations under European Market Infrastructure Regulation (EMIR) since as early as 15 March 2013. The UK Financial Conduct Authority (FCA) recently communicated its expectation that non-compliant firms should “have a detailed and realistic plan in place to achieve compliance within the shortest time-frame possible” and that they can demonstrate compliance with these Risk Mitigation obligations by 30 April 2014. As such, these firms must understand and comply with EMIR obligations, such as Portfolio Reconciliation and, more recently, Reporting.

In this webinar, Chatham will cover the following learning objectives:

- Understanding the requirements for reporting and risk mitigation including portfolio reconciliation
- Identifying operational solutions
- Relieving the ongoing compliance and administrative burden


Christina Norland, Esq. is Chatham’s deputy general counsel and works with Chatham’s business teams to address a variety of legal and business strategy issues. Christina also works closely with Chatham’s Regulatory Advisory Services Team, advising financial institutions, funds, REITs, and public and private companies on the impact of derivative regulations. Prior to Chatham, Christina practiced law as a commercial litigation attorney at Duane Morris LLP. Previously, she worked in social science research at the Center for Research on Child Wellbeing at Princeton University. Christina graduated cum laude from Wellesley College and holds a law degree, magna cum laude, from Temple University School of Law where she was Editor-in-Chief of the Temple Law Review.


Matt Hoffman, Esq. is a member of Chatham’s Hedge Advisory group, primarily advising corporate clients with regard to Dodd-Frank, EMIR, and other derivatives regulation, as well as document negotiation and hedging strategy. Prior to joining Chatham, Matt worked with the Benjamin Ross Group as a mergers and acquisitions advisor to the owners of privately held small businesses. Previously, he was an associate attorney with Duane Morris LLP, focusing on business reorganization and financial restructuring. Matt is a cum laude graduate of Brandeis University, where he earned a BA in Economics, and holds a JD from Columbia Law School, where he received the Outstanding Student Award from the Clinical Legal Education Association.


If you have not been given a password, please request one by emailing or by contacting your Chatham advisor. A password will be provided within 24 hours or next business day.

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New European Reporting Regs Overwhelm DTCC Data Repository

Friday, February 14th, 2014
New European Reporting Regs Overwhelm DTCC Data Repository
February 14, 2014

…“Advisory firm Chatham Financial, which offers a reporting service to its clients, says it was unable to report in the days running up to the deadline, but things have since been smoother. “We had difficulties getting interest rates through until just prior to the reporting deadline, but it wasn’t clear what the issues were. We were able to submit trades yesterday even without fully understanding the problems that had previously prevented us from reporting,” says Luke Zubrod, Chatham’s director of risk and regulatory advisory for public and private companies on over-the-counter regulations. Read More

Chatham Financial Launches EMIR Reporting Solutions as New Requirements Begin to Take Effect

Monday, January 13th, 2014
Chatham Financial Launches EMIR Reporting Solutions as New Requirements Begin to Take Effect
January 13, 2014
*Registration may be required

New Range of Services Offer Resources Necessary to Navigate New Regulations That Apply to all E.U. Entities Beginning in February
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Your Hedging Outlook 2014: Part II – Derviatives Regulation

Monday, January 13th, 2014

Calendar Changing

This is part two in a three-part series on the hedging outlook for 2014. Last week, we reviewed current Fed Policy and discussed the impact on hedging programs in 2014. This week, we look at the path of derivatives regulation and the expanding role of global regulation on domestic hedging programs.

Part II: Derivatives Regulation. Hedging programs in the U.S. changed monumentally over the past year. A veritable alphabet soup of regulatory requirements was heaped upon market participants, including the following:

- ECP: Now all market participants must be Eligible Contract Participants (ECPs), or be qualified so by virtue of certain qualifying owners or guarantors.

- LEI: Each hedging party must obtain and maintain a Legal Entity Identifier (LEI).

- End-User Exception: All parties to a new transaction who are eligible to do so must now preserve the right to enter into uncleared derivatives, lest they be required to clear.

- Central Clearing: Several of our clients set up clearing relationships with one or more Futures Commission Merchants (FCMs) in 2013, and now regularly centrally clear their deals that can be cleared.

- Swap Documentation: Parties who wished to continue to trade with a swap dealer or major swap participant had to adhere to certain protocols that wrapped new business conduct rules and swap trading relationship documentation requirements around their deals.

- Portfolio Reconciliation: A requirement to reconcile portfolios of swaps began in 2013, with swap dealer banks eager to comply with the mandate to at least offer such services and agree to terms with their clients in 2013.

- Reporting: Swaps were required to be reported to a swap data repository for the first time in 2013.

New market participants may not appreciate the evolution, but for anyone involved in the Dodd-Frank process to date, just understanding the rules and setting out on a path to compliance was a huge task in 2013.

As with the FOMC, a new chairman will also take over the CFTC, with nominee Timothy Massad expected to replace outgoing chairman Gary Gensler soon. There are many small compliance issues that need to be addressed this year for the first time, including renewal or “maintenance” of one’s LEI on the anniversary of first obtaining it (and annually thereafter). Public entities whose boards approved the ability to opt out of central clearing get to revisit their decision in another recurring requirement.

Additionally, there are also several new compliance events for some market participants in the coming year:

- Swap Execution Facilities (SEFs): The biggest news on the horizon for financial entities this year is the advent of trading on SEFs, with mandatory trading for certain trades as early as mid-February. This only impacts parties that are required to clear, and only those trades that have been made available to trade (“MAT”) on a particular SEF thus far. There are now 11 registered SEFs operating in the interest rate asset class, many of which are already accepting the type of trades soon to be required. As with any new market, attracting liquidity is a huge concern, as well as a SEF’s ability to support new technical requirements. As additional clearing and MAT determinations are made (e.g., for FX trades or amortizing swaps), SEF usage will grow over time.

- European Requirements: Along with SEFs, many clients engaging in swaps in 2014 with European banks or affiliates will have to understand their new obligations under the European equivalent of Dodd Frank, known as EMIR. For those entities that have their hands in both Dodd Frank and EMIR, extraterritoriality issues and substituted compliance could dominate the regulatory conversation. European reporting requirements begin to take effect this coming February.

- Margin: While margin requirements for uncleared swaps will not take effect in 2014, margin rules are likely to be finalized, setting up a potentially significant shift in how and under what circumstances trades will need to be collateralized. Early preparation for compliance will involve negotiating ISDA Credit Support Annexes or other standardized industry documentation.

While much of the heavy lifting with regulation and compliance is done, pronouncements from last year will join new requirements to impact your swap programs this year. Additionally, those transacting across borders may find the regulatory journey continuing for years to come as foreign regimes begin transitioning into a higher gear in order to avoid having Dodd-Frank’s requirements apply to transactions in their domestic markets. At Chatham we continue to consult clients on how to navigate the new rules and comply with those rules that are finalized and in place. Don’t hesitate to contact us if we can be of service to you, too!

Don’t forget to tune in next week for part three in this three-part series on the hedging outlook for 2014, Part III: Hedge Accounting


Give us a call at 610.925.3120 or email us

Chatham Financial Launches EMIR Reporting Solutions as New Requirements Begin to Take Effect

Monday, January 13th, 2014
New Range of Services Offer Resources Necessary to Navigate New Regulations That Apply to all E.U. Entities Beginning in February

January 13, 2014 (Kennett Square, PA, USA) – Chatham Financial, an independent full-service advisory and technology solutions provider, today announced a new suite of products and services to assist companies with reporting requirements under new European Market Infrastructure Regulation (EMIR) rules.

Starting February 12, 2014, all E.U. parties to derivatives, including end-user entities that are party to intragroup/inter-affiliate derivatives, will be responsible for the reporting of trade data to a Trade Repository. These reporting requirements pertain to any entity that is established in the E.U. and is a party to an outstanding derivative contract as of August 16, 2012, even if that contract has been terminated or has matured since then. The required reports encompass more than 60 data fields including both economic and counterparty related information.

With many end users presently not prepared to comply with these requirements, and some possibly not even aware of them, Chatham Financial has unveiled three specific offerings to help these entities address these new requirements:

- EMIR Reporting & Portfolio Reconciliation: This offering is ideal for companies looking for a third party to provide an end-to-end EMIR reporting solution. Chatham will complete the relevant data set, onboard the client to a Trade Repository, and then submit the required reports to that Trade Repository. In addition, Chatham will facilitate annual or quarterly portfolio reconciliation obligations, directing completion of necessary policy, documentation, and operational changes. This option provides a complete solution that requires the minimum resource commitment from the client and removes the need for hands-on bank coordination and document negotiation.

- Bank Delegation Service: For companies with a lower number of trades and counterparties, this service offers coordination with the relevant banks and the negotiation and storage of delegation documents. This option greatly reduces the stresses on the company’s organization.

- DIY Delegation Guide: This option is aimed at end users who have the internal resources to commit to coordinating and negotiating delegation documents with bank counterparties but want guidance to ensure they receive fair terms. This guide details the key steps in the delegation process, provides examples of suitable delegation document language and includes consultation with Chatham Financial’s EMIR experts.

“The new reporting requirements under EMIR can be quite complex, and for many businesses it makes sense to involve an outside expert who has the expertise and bandwidth to help them navigate this process,” said Ryan McKee, a senior advisor in Chatham’s regulatory advisory services group. “Whether it’s through providing end users with the knowledge they need to report on their own or by fully outsourcing the reporting responsibilities to Chatham’s team, our solutions can help companies shift the balance of energy from meeting reporting requirements to running their businesses.”

These offerings are built upon Chatham’s proven technology and compliance platforms, which are underpinned by more than twenty years of experience in the global derivatives markets, including in helping companies navigate reporting obligations brought on by EMIR in Europe and the Dodd-Frank Act in the U.S. Chatham Financial will be hosting a webinar to discuss these matters in greater detail on Tuesday, January 14, 2014 at 10AM EST; free registration is available at this link.

About Chatham Financial

Chatham Financial is a full-service financial risk management advisory services and technology solutions firm, serving clients in the areas of interest rate, foreign currency and commodity hedging, hedge accounting, regulatory compliance, and debt and derivatives valuations. Founded in 1991, Chatham serves over 1,200 companies annually, bringing deep derivatives expertise, services and technology solutions to our clients through a global team of risk management professionals, CPAs, analysts and technology developers.

Contact Jake Daubenspeck
On behalf of Chatham Financial
(203) 254-1300 x107

Your Hedging Outlook for 2014 – Part I: Fed Policy

Monday, January 6th, 2014

Calendar Changing In some ways, the turning of the calendar to a new year does what no other deadline nor holiday can do – generally speaking, it stops you in your tracks. Your time and team ran out as if you just played the biggest bowl game of your life, and having secured the victory in the 4th quarter, commenced celebrating the season in grand fashion. Congratulations all around to your winning team! What followed was a well-deserved break, and time to reconnect with friends and family. Wrapping up and reflecting on the prior year, you can be proud of what you accomplished, but still resolve to come back stronger and better prepared next year.

Welcome to next year. 2014, that is. Unlike in football, there is no offseason in your business. There is, however, a rhythm and routine that you will tap back into – some of us faster than others. The good news is that new developments in the derivatives and hedging world don’t usually come when no one is around to contemplate and appreciate them! Most of what will impact your hedging program in 2014 is already known, having come out in pronouncements, press releases, and notices of proposed rulemakings in the prior year. But just because you know what’s coming, that doesn’t mean you know how this year’s hedging season will unfold. Therefore, it’s worth examining more closely those areas of Fed policy (Part I), derivatives regulation (Part II), and hedge accounting (Part III) that will impact your program, to understand your management of business risks in 2014.

Part I: Fed Policy The biggest news no doubt is the departure of Ben Bernanke, with Janet Yellen going through Senate Confirmation for the seat today. After nearly 8 years at the helm, Ben Bernanke departs his post January 31st, leaving behind a Fed balance sheet that exceeds 4 trillion dollars, having ballooned so large under the policies of quantitative easing. To date, this has generally accomplished what was intended – namely, placing downward pressure on longer-term interest rates, which has powered a steady supply of business and residential refinancing for those in a position to do so. At the last FOMC meeting of 2013, a reduction in asset purchases from $85 bn to $75 bn per month was announced, the beginning of the long-awaited taper. But make no mistake, the Fed balance sheet continues to expand. There is consensus, even within the FOMC, that the balance sheet cannot expand indefinitely, and that taper must eventually lead to cessation of asset purchases, and a significant amount of de-levering. But when? At what rate? And, by how much? These are the questions left to Janet Yellen and the committee to resolve, and the ones that could begin to impact your hedging decisions in 2014.

Market participants largely expect Yellen to follow Bernanke’s lead, and emphasize the need for certain positive economic data, especially in the employment numbers, before committing to further tapering or changes to the balance sheet. What continues to give the Fed room to maneuver is ultra-low inflation, allowing the Fed to focus intently on maximizing employment. But there is also concern that the Fed has little ability to pivot if inflation were to rear up in 2014, or if exceedingly low inflation were to become a problem of its own. When the game plan calls for removing accommodation slowly and methodically, how do you do so quickly and just-in-time, without major market disruptions or throwing the economy into recession? Perhaps we have another year of QE taper and near zero fed funds target rates ahead. It’s also possible that to take the fight to inflation tomorrow, the Fed would have to act today, anticipating considerable lag. As much as people think “status quo” when the new Chairwoman takes her seat at the head of the table, Janet Yellen would undoubtedly open up a second front against inflation if the need arose, which is why the Fed’s reaction to incoming economic data continues to be what to watch in 2014.

As with any game, a break in the action lets you catch your breath and get refreshed for future action. Whether you plan to ease on into 2014, or take the year by storm, don’t hesitate to lean on Chatham to help you assess the impact on your business and hedging programs from Fed policy, derivatives regulation, and changes in hedge accounting rules. Welcome back!

Don’t forget to tune in next week for part two in this three part series on the hedging outlook for 2014, Part II: Derivatives Regulation

Give us a call at 610.925.3120 or email us

USD Regulation: Non-financial end users

Monday, December 23rd, 2013
USD Regulation: Non-financial end users
By Yiying Luthra
December 17, 2013
Registration May Be Necessary

In a recent conversation with Luke Zubrod, Director of Risk and Regulatory Advisor at Chatham Financial, Zubrod believes that going into 2014 “the main question for non-financial end users is whether the margin regime apply.”
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The White Hot Spotlight of Regulation

Monday, September 9th, 2013

badge and ID

They’re calling it the “Walkie-Scorchie,” or “Fry-Scraper,” but to local businesses it’s anything but funny. The new 37 story building going up at 20 Fenchurch Street in London’s financial district is a sight to see, with unusual concave shaped windows and more space on the upper floors than on lower ones. The radical design is instantly recognizable in the London skyline, but tourists are drawn to it not so much to marvel at the architecture as to witness a now undeniable phenomenon: The building can produce a “death ray” of light so hot that it has started fires and melted cars unfortunate enough to be parked in its path.

As it turns out, for two to three hours a day when the sun is brightest and hottest, the windows reflect and focus sunlight with such intensity that temperatures have been recorded at over 230F (110 C) at points below. When you recall that water boils at 212 F (100 C) you begin to realize the problems this light beam can cause for businesses, vehicles, and people in its path. As the autumn sun begins to set lower the phenomenon is expected to wane, giving the builder’s some time to mull over a permanent fix before the summer sun returns. In the meantime, they have erected a screen to diffuse some of the light, and closed off several parking spots that have come under fire (pun intended).

How could a building, presumably benefiting from centuries of architectural innovation, evolution, and best practice design, be configured in such a way as to be harmful to the surrounding community? In this day and age! To be sure, the design is not accidental – it’s a key feature and signature element of Uruguayan architect Rafael Vinoly’s contemporary style. He wanted to build a structure with dazzling brilliance, but surely not to the point of burning things! Not surprisingly, we at Chatham see many parallels to derivatives regulation, a similarly well-intentioned, half-completed venture already impacting banks and businesses below. Designed to increase transparency and contain systemic risk, regulation has nonetheless impacted end users of derivatives in ways that are at times quite burdensome and costly, with key provisions yet to play out in full. Here are just three of those areas causing concern

Transparency (for transparency’s sake?). Even staunch critics of derivatives regulation can agree that Dodd Frank has opened the door to more information than ever before. Already, one can go to the CFTC website and find the list of registered swap dealers (SDs), designated contract markets (DCMs), derivatives clearing organizations (DCOs), swap data repositories (SDRs), and provisionally registered swap execution facilities (SEFs). For those with a conspiracy theory mindset, you can also find out who met with whom at the CFTC, and on what date and regarding what broad topic. A treasure trove of new information is available to market participants and regulators on the SDRs themselves, as reported trades offer a glimpse at volumes within OTC derivative categories for the first time. How can this possibly be bad? A better question might be, “How can this possibly be used?” Recall that as a hallmark of this regulation, transparency is intended to help regulators see the market interconnectedness and know the magnitude of developing problems in real time. And yet, for all the new structures and visibility, the market is fragmented in ways that are proving difficult to gather meaningful information. How can regulators avert the next crisis if they have to query multiple platforms to see a crisis in progress? Do they even have the right information to make such a judgment? With transparency comes a new responsibility to sew together market information in ways that will prevent, not obscure, the next crisis. Transparency just for the sake of it can give a false sense of security and blind us to a future crisis.

Still Under Construction. Three years have gone by since enactment of Dodd Frank legislation, with much still left to do. Like the new building going up in London’s financial district, the derivatives rulemaking under Title 7 of Dodd Frank is similarly half done, with over 45 rules yet to be completed. But we can nonetheless see the outline of the building on the horizon, and witness the impact of such a huge new structure on the marketplace. Key features are already present, such as the clearing mandate and the end user exception from central clearing. The predominant derivatives clearing organizations (DCOs) are reporting consistent growth of cleared derivatives, leaving fewer and fewer transactions strictly over the counter. But other key features remain under construction, such as swap execution facilities (SEFs) and margin for uncleared derivatives. While we can make out the outlines of these new features, the infrastructure and utilities are not yet in place. Will they be thoughtfully finalized and implemented, or will they scorch market participants in ways as yet unforeseen? It is expected that OTC derivatives will, by design, become more expensive, as regulators seek to incent market participants to move more derivatives through clearing venues. We still need several years to see these and other remaining key features play out to know the full impact, but it is already clear the derivatives marketplace is vastly changed by the presence of this new Dodd Frank structure, even half built.

Unintended Consequences. No building built today could ever be planned and erected in isolation. The impact on and interaction with neighboring structures, transportation networks, and energy grids, must all be carefully considered with a project the size of 20 Fenchurch Street. Even then, as the “death ray” issue shows, some serious design flaws can surface that must be resolved for a project to co-exist in harmony with its neighbors. With Dodd Frank, some of this pre-work did happen – legislators and their fellow committee members were generally receptive to ideas from market participants – but the agenda of preventing the next financial crisis was, at times, at odds with making the market more friendly and accessible to derivative end users. The heavy hand of regulation that falls on swap dealers and other newly registered market participants is no less burdensome to everyday businesses who just want to manage interest rate, currency, or commodity risks. Businesses will bear the costs of this regulation – through higher transaction fees, capital charges, protocol adherence, and registrations (think LEIs), and compliance resources. It does us all no good if the weight of these added costs is sufficient to compel businesses to take otherwise undesirable risks themselves and forgo hedging. Clearly, our regulators no more intended to make a derivative “death ray,” any more than the architect behind the “Walkie-Scorchie.” And yet, when there is clear evidence that your building can burn or melt the surroundings, regulators must put up the screens and correct course before they burn down these vital risk transfer markets.

Derivatives regulation has the potential to exact positive changes on the market and make it safer and more transparent, but it could also make it more difficult and costly for end users to hedge in the process. Chatham has been working to be a force in easing many of the burdens created by regulation. The key challenge for regulators will be to harmonize the essential priorities of risk mitigation and transparency with the equally important need for efficient functioning for end users.