At the end of July 2010, the US President Barack Obama signed Dodd-Frank

Wall Street Reform and Consumer Protection Act. The document implies a
modernisation of the financial system of the United States. In particular, changes
were made to The Commodity Exchange Act, The Securities Exchange Act and
The Bank Holding Company Act. So serious reform of the US financial legislation
has not been since the Great Depression. The need for the adoption of the
regulation was prompted due to the financial crisis, which took place in the United
States and all over the world in the second half of 2008, and the ensuing recession.
Schwartzman (2013) notes that the main purpose of the law is to increase
transparency through reporting and trading on regulated markets, particularly on
exchanges. Another reason of the reform is to reduce the risk of new crisis of the
financial system in the future. To date, many analysts believe that the main cause of
the crisis of 2008-2009 were risky derivatives transactions in the global financial
markets, including the US. Additionally, losses of the largest banks and insurance
companies in the US, such as Lehman Brothers and AIG, from transactions with
derivatives were key episodes in the development of the crisis, according to David
M. Manson (2010). Therefore, a significant part of the adopted act is about the
regulation of derivatives transactions.
Oaikhenan (2006) indicates that the derivatives are the financial instruments
whose price depends on the value of the underlying asset, such as stocks, bonds,
currencies or certain types of goods. Derivatives market is traditionally divided into
the exchange and Over-the-Counter Markets (OTC). Derivative transactions in the
OTC market are concluded directly between the parties without registration on the
stock exchange and attracting any intermediaries. Prior to the global financial crisis,
the volume of trading on the OTC significantly exceeded the volumes of the
organized market and as of June 2008, it was about 684 trillion dollars, according to
the Bank for international settlements report.
After the crisis, it became clear that some steps should be taken in order to
avoid future crises. It is an act of Dodd-Frank, which started the beginning
futurisation of swaps. This can be virtually traded as an replacement to swaps and
it will particularly target those swaps that due to their liquidity and relative
standardization, are already voluntarily cleared or are likely to be subject to
mandatory clearing. On the one hand, the act implies a decrease in credit risk and
the possibility of starting a new financial crisis, but also prevents the development
of the derivatives market. Nevertheless, the OTC market developed swaps, which
are now traded on the market. Therefore, there are advantages and disadvantages
of total regulation of the derivatives market.
Primarily, swap market regulation leads to a decrease in the risk of credit
transactions and increase transparency, there is no possibility of providing risky
operations.
The new law passed regulation of swaps to the Commodity Futures Trading
Commission and the Securities and Exchange Commission. Swap itself has been
given a precise definition. Regulators should consult with each other and with the
Federal Reserve System before making new rules for the market. Now, market
participants must register any instrument. In addition, they should periodically
provide information on swaps and deals with them to the regulatory authorities, as
well as to specialized organizations responsible for collecting information.
This Law on transparency and accountability to Wall Street has created a new
category for registration of market participants. The law imposes restrictions on the

size of positions in all futures and swaps on the same tool for market participants. In
addition, new regulatory measures require that the majority of transactions must
take place of the process of clearing in the regulated clearing organization. In
addition, swaps corresponding to these requirements must apply on regulated
markets (such as contract markets or swap execution facilities).
Furthermore, according to Omahen J., transferring of OTC market to exchange
reduces the margin to hold a position. This is due to the fact that swap contracts
become standardized and there is no need to determine the cost for each contract.
The author also notes that this method of trading provides for sell-side the clearing
certainty - only one company is engaged in trading and provides strict requirements
for market participants.
Silva emphasizes the importance of central counterparties (CCPs) for OTC
derivatives trading. The author argues that the creation of a single center, with an
indication of the requirements for the disclosure of better quality public data creates
an opportunity for a more accurate assessment of counterparty risk. It is also worth
noting that the low counterparty risk increases safety and efficiency in the OTC
market.
Another incomparable advantage, according to Culp, is that the CCP is
responsible for the supervision of market participants and potential risks. In other
words, the CCP can function as a "delegated risk manager" for its clearing
participants. In addition, the CCP will inherit the remaining open positions of any
default of a clearing member, and then usually goes to liquidate or hedge them as
quickly as possible in nondestabilizing way. In the case of default of the
counterparty CCP is taking the necessary steps to hedge against losses. Ultimately,
collateral assets can cover the losses. If the losses are not covered, the CCP will
bear the costs of their own then. This is another advantage of creating a single
clearinghouse, as all transactions go through one organization and it will be more
likely to cover the losses by its extra funds or even by over members funds.
On the contrary to the advantages, the futurization of swaps poses several
policy problems which are yet to be addressed. Firstly, the capital margin which the
customers are required to post may be greatly impacted by a DCOs ability to allow
reduction in initial margin leading to the cost of margin for the swaps being higher
than the cost of margin for futures . Further research is yet to be conducted on
portfolio margining as suggested by Kathryn M (2013) . However, the article
Futurization equation argues that this can easily be overcome by the DCO only
Futurizing swaps that are held in the future accounts, together with related future
contracts allowing for significant savings from risk offsets. This is further supported
by Rosenberg, Gabriel D (2013) as they continue to argue saying this will only be
an issue to low risk financial end users as historically swap markets are views as
more appropriate for sophisticated market participants who will under the risk in
association.
The second concerning disadvantage is the block size threshold which
according to section 727 of the DFA is the real time reporting The threshold could be
so low that many of their swap futures could be trading off exchange leading to
opaque pricing and wider ask spreads for price discovery. post-trade transparency
of these types of trades can lead to pre-trade signalling for the subsequent hedging
transactions, resulting in negative effects including decreased liquidity, reduced
ability to trade, and increased costs to hedge risks as according to ISDA and SIFMA
(2011,). Nevertheless, as mentioned by Latin R (2011) the block trade reporting

delays should be set so that liquidity is not impaired and investors can hedge their
risks in a cost-effective way.
When a seller, for instance, sends an order to an exchange, it may take some time
to match the trade with natural buyers. In this situation, an OTC dealer can provide
immediacy, quickly absorbing the position into its inventory and laying it off over
time to other investors. This provision of liquidity is an important economic function.

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