Editing Derivative (finance) (section)

==Financial reform and government regulation==
Under US law and the laws of most other developed countries, derivatives have special legal exemptions that make them a particularly attractive legal form to extend credit. The strong creditor protections afforded to derivatives counterparties, in combination with their complexity and lack of transparency however, can cause capital markets to underprice credit risk. This can contribute to credit booms, and increase systemic risks. Indeed, the use of derivatives to conceal credit risk from third parties while protecting derivative counterparties contributed to the [[2008 financial crisis]] in the United States.

In the context of a 2010 examination of the [[Intercontinental Exchange|ICE Trust]], an industry self-regulatory body, [[Gary Gensler]], the chairman of the [[Commodity Futures Trading Commission]] which regulates most derivatives, was quoted saying that the derivatives marketplace as it functions now "adds up to higher costs to all Americans". More oversight of the banks in this market is needed, he also said. Additionally, the report said, "[t]he [[United States Department of Justice|Department of Justice]] is looking into derivatives, too. The department's antitrust unit is actively investigating 'the possibility of anticompetitive practices in the credit derivatives clearing, trading and information services industries', according to a department spokeswoman."<ref>Story, Louise, [https://www.nytimes.com/2010/12/12/business/12advantage.html?hp "A Secretive Banking Elite Rules Trading in Derivatives"], ''The New York Times'', December 11, 2010 (December 12, 2010, p. A1 NY ed.). Retrieved December 12, 2010.</ref>

For legislators and committees responsible for financial reform related to derivatives in the United States and elsewhere, distinguishing between hedging and speculative derivatives activities has been a nontrivial challenge. The distinction is critical because regulation should help to isolate and curtail speculation with derivatives, especially for "systemically significant" institutions whose default could be large enough to threaten the entire financial system. At the same time, the legislation should allow for responsible parties to hedge risk without unduly tying up working capital as collateral that firms may better employ elsewhere in their operations and investment.<ref>Zubrod, Luke (2011). ''The Atlantic''. "Will the 'Cure' for Systemic Risk Kill the Economy?" https://www.theatlantic.com/business/archive/2011/06/will-the-cure-for-systemic-risk-kill-the-economy/240600/</ref> 
In this regard, it is important to distinguish between financial (e.g. banks) and non-financial end-users of derivatives (e.g. real estate development companies) because these firms' derivatives usage is inherently different. More importantly, the reasonable collateral that secures these different counterparties can be very different. The distinction between these firms is not always straight forward (e.g., hedge funds or even some private equity firms do not neatly fit either category). Finally, even financial users must be differentiated, as 'large' banks may classified as "systemically significant" whose derivatives activities must be more tightly monitored and restricted than those of smaller, local and regional banks.

Over-the-counter dealing will be less common as the [[Dodd–Frank Wall Street Reform and Consumer Protection Act]] comes into effect. The law mandated the clearing of certain swaps at registered exchanges and imposed various restrictions on derivatives. To implement Dodd-Frank, the [http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm CFTC developed new rules in at least 30 areas]. The Commission determines which swaps are subject to mandatory clearing and whether a derivatives exchange is eligible to clear a certain type of swap contract.

Nonetheless, the above and other challenges of the rule-making process have delayed full enactment of aspects of the legislation relating to derivatives. The challenges are further complicated by the necessity to orchestrate globalized financial reform among the nations that comprise the world's major financial markets, a primary responsibility of the [[Financial Stability Board]] whose progress is ongoing.<ref>Financial Stability Board (2012).  "OTC Derivatives Market Reforms Third Progress Report on Implementation" June 15, 2012 http://www.financialstabilityboard.org/publications/r_120615.pdf</ref>

In the U.S., by February 2012 the combined effort of the SEC and CFTC had produced over 70 proposed and final derivatives rules.<ref name="lexology1">{{cite web|author=Proskauer Rose LLP |url=http://www.lexology.com/library/detail.aspx?g=e7db9a60-9fca-449b-850b-b4a32d1e425d |title=SEC and CFTC oversight of derivatives: a status report |date = February 6, 2012|publisher=Lexology |access-date=March 5, 2013}}</ref> However, both of them had delayed adoption of a number of derivatives regulations because of the burden of other rule-making, litigation and opposition to the rules, and many core definitions (such as the terms "swap", "security-based swap", "swap dealer", "security-based swap dealer", "major swap participant" and "major security-based swap participant") had still not been adopted.<ref name="lexology1"/> SEC Chairman [[Mary Schapiro]] opined: "At the end of the day, it probably does not make sense to harmonize everything [between the SEC and CFTC rules] because some of these products are quite different and certainly the market structures are quite different."<ref>{{cite news |last=Younglai |first=Rachelle |url=http://in.reuters.com/article/idINIndia-40440620090619 |title=Interview – Not all SEC, CFTC rules must be harmonized |work=Reuters |access-date=March 5, 2013 |archive-date=March 6, 2016 |archive-url=https://web.archive.org/web/20160306172405/http://in.reuters.com/article/idINIndia-40440620090619 |url-status=dead }}</ref> On February 11, 2015, the Securities and Exchange Commission (SEC) released two final rules toward establishing a reporting and public disclosure framework for security-based swap transaction data.<ref>{{cite web |url=http://www.pwc.com/en_US/us/financial-services/regulatory-services/publications/assets/sec-swap-reporting-and-disclosure.pdf |title= First take: Ten key points from the SEC's swaps reporting and disclosure rules |publisher= PwC Financial Services Regulatory Practice, February 2015}}</ref> The two rules are not completely harmonized with the requirements with CFTC requirements.

[[File:Dmitry Medvedev at G20 Pittsburgh summit-1.jpg|thumb|300px|Country leaders at the [[2009 G-20 Pittsburgh summit]]]]
In November 2012, the SEC and regulators from Australia, Brazil, the European Union, Hong Kong, Japan, Ontario, Quebec, Singapore, and Switzerland met to discuss reforming the OTC derivatives market, as had been agreed by leaders at the [[2009 G-20 Pittsburgh summit]] in September 2009.<ref name="autogenerated1">{{citation-attribution|1={{cite web|url=https://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171486526 |title=Joint Press Statement of Leaders on Operating Principles and Areas of Exploration in the Regulation of the Cross-Border OTC Derivatives Market; 2012-251 |publisher=Sec.gov |date=December 4, 2012 |access-date=March 11, 2016}} }}</ref> In December 2012, they released a joint statement to the effect that they recognized that the market is a global one and "firmly support the adoption and enforcement of robust and consistent standards in and across jurisdictions", with the goals of mitigating risk, improving [[Transparency (market)|transparency]], protecting against [[market abuse]], preventing regulatory gaps, reducing the potential for [[arbitrage]] opportunities, and fostering a [[level playing field]] for market participants.<ref name="autogenerated1"/> They also agreed on the need to reduce regulatory uncertainty and provide market participants with sufficient clarity on laws and regulations by avoiding, to the extent possible, the application of conflicting rules to the same entities and transactions, and minimizing the application of inconsistent and duplicative rules.<ref name="autogenerated1"/> At the same time, they noted that "complete harmonization – perfect alignment of rules across jurisdictions" would be difficult, because of jurisdictions' differences in law, policy, markets, implementation timing, and legislative and regulatory processes.<ref name="autogenerated1"/>

On December 20, 2013, the CFTC provided information on its swaps regulation "comparability" determinations. The release addressed the CFTC's cross-border compliance exceptions. Specifically it addressed which entity level and in some cases transaction-level requirements in six jurisdictions (Australia, Canada, the European Union, Hong Kong, Japan, and Switzerland) it found comparable to its own rules, thus permitting non-US swap dealers, major swap participants, and the foreign branches of US Swap Dealers and major swap participants in these jurisdictions to comply with local rules in lieu of Commission rules.<ref>{{cite web |url= http://www.pwc.com/en_US/us/financial-services/regulatory-services/publications/assets/fs-reg-brief-dodd-frank-cftc-derivatives.pdf |title= Derivatives: A first take on cross-border comparability |date=December 2013}}</ref>

===Reporting===
Mandatory reporting regulations are being finalized in a number of countries, such as [[Dodd Frank Act]] in the US, the [[European Market Infrastructure Regulation]]s (EMIR) in Europe, as well as regulations in Hong Kong, Japan, Singapore, Canada, and other countries.<ref name="autogenerated2">{{cite web |url=http://www.dtcc.com/products/derivserv/suite/global_trade_repository_for_otc_derivs.php |title=DTCC's Global Trade Repository for OTC Derivatives ("GTR") |publisher=Dtcc.com |access-date=March 5, 2013 |archive-url=https://web.archive.org/web/20130320070237/http://www.dtcc.com/products/derivserv/suite/global_trade_repository_for_otc_derivs.php |archive-date=March 20, 2013 |url-status=dead }}</ref> The OTC Derivatives Regulators Forum (ODRF), a group of over 40 worldwide regulators, provided trade repositories with a set of guidelines regarding data access to regulators, and the Financial Stability Board and CPSS [[IOSCO]] also made recommendations in with regard to reporting.<ref name="autogenerated2"/>

[[Depository Trust & Clearing Corporation|DTCC]], through its "Global Trade Repository" (GTR) service, manages global trade repositories for interest rates, and commodities, foreign exchange, credit, and equity derivatives.<ref name="autogenerated2"/> It makes global trade reports to the CFTC in the U.S., and plans to do the same for ESMA in Europe and for regulators in Hong Kong, Japan, and Singapore.<ref name="autogenerated2"/> It covers cleared and uncleared OTC derivatives products, whether or not a trade is electronically processed or bespoke.<ref name="autogenerated2"/><ref>{{cite news|url=https://www.reuters.com/article/derivatives-exposure-idUSL5N0BCHZ220130212 |title=U.S. DTCC says barriers hinder full derivatives picture |work=Reuters |date=February 12, 2013 |access-date=March 5, 2013}}</ref><ref>{{cite web |last=Release |first=Press |url=http://www.futuresmag.com/2010/08/05/derivatives-trades-will-be-tracked-by-depository-t |title=Derivatives trades will be tracked by Depository Trust |publisher=Futuresmag.com |date=August 5, 2010 |access-date=March 5, 2013 |archive-date=June 19, 2013 |archive-url=https://web.archive.org/web/20130619163011/http://www.futuresmag.com/2010/08/05/derivatives-trades-will-be-tracked-by-depository-t |url-status=dead }}</ref>