Dodd-Frank: A move away from standardization?


Another musing on the Dodd-Frank bill and SEF regulations in particular:

Title VII of the regulation refers to ‘standardized swaps’ – yet to be clearly defined, but lets assume this will include (but not be limited to) the more liquid IRS products – those that will be handled by central counterparties and clearing facilities.

Now, what’s to stop dealers quoting small tweaks to these to create customized swaps – for example a small adjustment to a standard OTR? Some banks are already talking about this idea.

Of course they already quote custom swaps for specialist needs. But I mean small customisations away from standardized swaps – a tweak of the dates for example. Suddenly these won’t be covered by the regulation, won’t need to be traded using SEFs, and it won’t be possible to clear them using clearing houses. This would conveniently subvert the regulations and allow dealers to continue with less transparent (and potentially non-electronic) transactions.

It would be ironic if this did happen – it would be totally against the spirit of the legislation and another example of the chasm and tensions between the lawmakers, regulators and¬†implementers…

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