Rules and Regulations of Derivatives

Question 1

What issue highlighted the lack of regulation in derivatives?

Answer 1

2007-08 crisis

Question 2

What is the name of the US regulation on derivatives?

Answer 2

The Dodd-Frank Act

It also placed rules around “too big to fail banks”

Question 3

What 3 agencies did the Dodd Frank Act Create?

Answer 3

1) Consumer Financial Protection Bureau
2) Financial Stability Oversight Council
3) Office of Financial Research

also gave more responsibility to FDIC

Question 3

Name 3 things the Dodd-Frank Act did to derivatives?

Largely affected OTC

Answer 3

1) Improved Liquidity
2) Improved Transparency
3) Reduced counterparty risk by mandating a CCP be used by both parties in some otc trades

Question 4

What does the Consumer Financial Protection Bureau do?

Answer 4

Aims to protect consumers against abuse

Question 5

What does the Financial Stability Oversight Council Do?

Answer 5

identifying risks to the financial stability of the United States; promoting market discipline; and responding to emerging threats to the stability of the U.S. financial system.

Question 6

What does the office of Financial Research do?

Answer 6

helps to promote financial stability by looking across the financial system to measure and analyze risks

Provides support to the FSOC

Question 7

What are the acronyms for the 3 agencies Dodd-Frank created?

Answer 7

1) CFPB
2) FSOC
3) OFR

Question 8

What is the EU / UK version of Dodd-Frank?

Answer 8

EMIR

European Market Infrastructure Regulation

Question 9

What were the 3 main aims of EMIR?

Answer 9

1) Increase transparency in OTC derivative markets
2) Mitigate Credit Risk
3) Reduce Operational Risk

Question 10

In 2022 ESMA published EMIR REFIT - what does it do?

Answer 10

Improved reporting standards - counterparties have to update derivatives contracts within 180 days from the start date

Question 11

What version of EMIR does the UK use and how is it different?

Answer 11

UK EMIR - began to diverge post brexit - update in Sept 2024 - improve monitoring for systemic and stability risks

Question 12

What did EMIR focus on to improve transparency

Answer 12

Trade repositories

Question 13

What is a trade repository?

Answer 13

an entity that centrally collects and maintains the records of over-the-counter derivatives

Question 14

What 3 things did EMIR state regarding improving transparency

Answer 14

1) Trade repositories must disclose the total holding of each class of derivative
2) ESMA in EU and FCA in UK are responsible for the monitoring of trade repositories
3) Detailed contract information must be reported to trade repositories

Question 15

What did EMIR focus on in order to reduce credit risk?

Answer 15

Central Counterparties

Question 16

What things did EMIR state re: Reducing Credit Risk?

Answer 16

1) All standardized OTC contracts must clear through a CCP
2) Those that don’t go through a CCP must have risk mitigation techniques applied
3) CCPs are subject to stringent regulation

Question 17

How does EMIR minimise operational risk?

Answer 17

Market participants were instructed to monitor and mitigate any operational risk