April 18, 2012
Mastering swaps

According to Reuters, the SEC and CFTC are moving toward finalization of a definition for “swap dealer.”

In a swap trade, Party A exchanges the cash flows of its financial instrument for that of Party B. According to the Financial Regulatory Reform Center, a “swap dealer” is any person that:

·         Holds itself out as a dealer in swaps

·         Makes a market in swaps

·         Regularly enters into swaps with counterparties in the ordinary course of business for its own account

·         Engages in any activity causing the person to be commonly known as a dealer or market maker in swaps in connection with the CFTC-regulated swaps

In Derivatives Demystified: A Step-by-Step Guide to Forwards, Futures, Swaps and Options, author Andrew M. Chisholm enables readers to gain a solid working knowledge of these concepts.

 The SEC/CFTC “swap dealer” tag is expected to come with more oversight and increase the cost of such trades. The designation also will give firms latitude to exempt swaps for hedging.

Reuters notes that the Dodd-Frank financial oversight law, which was first proposed in December 2010 in reaction to the financial crisis, has changed dramatically. While it originally allowed firms to be designated swap dealers if they traded more than $100 million in swaps over a 12-month period. As Reuters reports, energy companies and commodity traders lobbied to alter the provision to bump the threshold to $8 billion for most asset classes as an initial phase-in. In time, the threshold could drop to $3 billion.

Both regulatory agencies face legal challenges over the rules. There also are concerns that the SEC and CFTC have not fully analyzed the economic impact and rule formulation processes.

To learn more about swaps, futures, options and other financial instruments affected by Dodd-Frank, go to TradersPress.com. There, you’ll find everything priced to meet or beat those you’d find on Amazon and you’ll receive free S&H when you spend $25 or more.

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August 1, 2011
Cautiously Optimistic

U.S. Federal Reserve leaders said recently that they’ll revisit derivatives rules if a global agreement on margin requirements couldn’t be reached.

It’s about time, but I reserve the right to be skeptical. I’m optimistic about nearly everything, but this whole situation receives a cynical snort of derision from me.

As Financial Times notes, oppressive rule-making in the United States has harmed to the over-the-counter derivatives markets. Meanwhile, Reuters reported that global financial lobbies warned U.S. and European Union authorities that inconsistent regulation of derivatives trading will drive up costs and harm the economy.

Several resources describe how derivatives work and outline how to use futures contracts, forward contracts, options and other common derivatives.

Options Strategies for Sophisticated Traders by Mitch Crask explains how to combine derivatives to increase profitability and option debt spreads.

For the true account of the multibillion-dollar bidding war for the Chicago Board of Trade, check out Zero Sum Game: The Rise of the World’s Largest Derivatives Exchange by Erika S. Olson.

SFO (Stocks Futures Options) magazine offers nearly 1,000 archived articles on a variety of topics related to derivatives, including “Regulators’ Unintentional Effect on Markets” from July 2011 and “France’s Sarkozy urges global community to regulate agricultural futures.” SFO is always free, and subscribing takes just a few minutes. 

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