Does the current version of the Dodd-Frank Act ban speculative positions in non-exchange cleared (OTC) swaps?

It does not refer to any specific type of swap, but my current understanding of the bill is that it attempts to control the kinds of speculation that caused the huge losses during the last financial crisis. Part of those losses were swaps and other derivatives that were entered into by financial institutions as a way to sell off risk or make bets with capital that would not have been possible except through those instruments.

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    Central clearing does not necessarily mean exchange clearing, and certainly doesn't imply exchange traded. Oct 17, 2011 at 16:29
  • I understand that. But what I'm asking is if it implies that if you don't have a verifiable hedge to seek through the swap, are you banned from entering the swap except through an exchange traded vehicle. Oct 18, 2011 at 3:02

1 Answer 1


Tough reading.

‘(A) STANDARD FOR CLEARING- It shall be unlawful for any person to engage in a swap unless that person submits such swap for clearing to a derivatives clearing organization that is registered under this Act or a derivatives clearing organization that is exempt from registration under section 5b(j) of this Act.‘(B) this Act if the swap is required to be cleared.

See Full bill text of H.R.4173 Dodd-Frank Wall Street Reform and Consumer Protection Act and scroll down to Sec 722.

The way I read this, Swaps are regulated and deemed to not be an insurance product. i.e. regulated as a security, not insurance. I believe this forces them to be exchange-traded.

  • Yeah it is hard to get the subtleties in that legal jargon sometimes. But what that says to me is that it is only illegal to enter a swap OTC (not by exchange) if the swap is available through an exchange. What I mean is if there is a swap not cleared through an exchange and not required to be, does the counterparty still have to prove the hedge in order for it to be legal? If not then obviously the bill doesn't really do anything except limit the customization and effectiveness that a swap allows for customers. Oct 12, 2011 at 21:34
  • I keep coming back and rereading the quote above thinking at some point it will make sense. As it stands I read that it depends on what the meaning of IS is.
    – user4127
    Oct 13, 2011 at 20:28
  • Yeah chad i think what i means is like i said in my comment above. It doesn't quite answer the question it just says if a swap is available with the same terms on an exchange it is illegal to do it OTC. But what I'm talking about is people that don't have a legitimate business risk to hedge with a swap doing it to speculate on the market. Which is what caused all the garbage in the first place. People speculated and sold risk and then when they had to unwind/pay margin calls it swung the market wildly. Oct 14, 2011 at 3:51
  • The Act eliminates non-exchange traded swaps. Speculation can and will continue but the swaps will be regulated differently than they were prior to this bill. Oct 16, 2011 at 2:10
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    I don't believe that it eliminates all non-exchange traded swaps. If it did my current employer would no longer have a business because that would mean the OTC market is now illegal. While the new regulations piss them off and makes things more difficult, I don't believe it is eliminating the OTC market. Oct 18, 2011 at 3:06

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