Dodd-Frank 30 Day Countdown: Day 17

Smaller Funds May Have Trouble Finding Clearing Member

Though uncertainty may seem to be the one definite aspect of the regulations outlined in Title VII of the Dodd-Frank Act, experts warn that hedge funds should proactively select and secure a clearing member to handle their OTC derivative transactions. Many of the larger funds have reportedly made such arrangements, but smaller hedge funds may be procrastinating in order to conserve legal and operations budgets.  As a result, clearing members, currently inundated with their own regulatory implementation projects, may not have the capacity to make these smaller funds a priority.  These funds may find themselves unable to trade when the full force of Dodd-Frank comes in effect.

As previously reported (on Day 28 of this countdown), the FIA and ISDA have published documentation for Cleared Swaps in an effort to add structure to the OTC market pending full implementation of Dodd-Frank.  The “Cleared Derivatives Execution Agreement,” similar in concept to the FIA template give-up agreement that was developed for use with exchange-traded futures contracts, addresses the procedures to be used (regardless of clearing house) to submit trades for clearing and the fall back rules in the event any clearing house fails to accept a trade.  A detailed explanation of the document structure can be found here:

http://www.futuresindustry.org/downloads/ExecutionArrangementComparison-June122011%28final%29.pdf

The Cleared Derivatives Execution Agreement was drafted to be used specifically with CFTC regulated swaps, and has not yet been adapted to SEC regulated security-based swaps.  So we know that in its current form, the Agreement is just a starting point, with many of the nuances still to be defined when the CFTC rules relating to swap execution facilities and swap trading documentation are finalized. But now that the OTC market has a standard document to look to, the funds have little excuse for not making at least initial contact with the clearing member of their choice.  If anyone needs help in getting the process started, just let us know.

-Stephanie Kane co-authored this post