Slideshow Defining Dodd-Frank: A Glossary of Acronyms

  • February 16 2012, 9:58am EST
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Defining Dodd-Frank: A Glossary of Acronyms<br><br>

The Dodd-Frank Wall Street Reform and Consumer Protection Act creates a comprehensive framework for regulating derivatives markets, principally what has been an over-the-counter market for complex products such as credit default swaps.

The framework is covered in Title VII of the legislation.

Most of these OTC contracts now will be traded in regulated exchanges or similar facilities.

What acronyms will you need to keep track of as clearing of what can be considered exchange-traded swaps starts up?

Here’s one answer. The list comes from Mike Mykytiw, Executive Director and Senior Accounting Product Manager, Worldwide Securities Services, J.P. Morgan, speaking at NICSA’s 30th Annual Conference and Expo this week in Miami.

Derivatives Clearing Organization<br><br>

A clearinghouse, clearing association, clearing corporation, or similar entity that enables each party to a transaction to substitute the credit of the DCO for the credit of the parties. Any party that wants to act as a clearinghouse for the interest-rate, credit default and other swaps being standardized as a result of Dodd-Frank must register with the Commodity Futures Trading Commission.

A DCO must submit each swap or type of swap that the DCO or clearing agency plans to accept for clearing to the CFTC (or SEC, in the case of securities-based swaps) for approval, first.

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Central Counter Party<br><br>

A clearinghouse. See: Derivatives Clearing Organization.

Futures Commission Merchant<br><br>

Brokers of swaps contracts. Any person that holds margin for customers in swaps cleared by a Derivatives Clearing Organizaiton is required to register with the CFTC as a futures commission merchant.

Swap Dealer<br><br>

An entity that makes a market in swaps, regularly enters into swaps in the ordinary course of business, or is commonly known in the trade as a dealer. Swap dealers must comply with capital, margin, business conduct, recordkeeping and reporting standards.

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Major Swap Participant<br><br>

An entity that maintains a substantial position in swaps for any of the major swap categories, whose outstanding swaps create substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets or a highly leveraged financial entity that is not subject to regulatory capital requirements and that maintains a substantial position in outstanding swaps in any major swap category.

Swap Data Repositories<br><br>

An entity that keeps records on swaps. Swap data repositories must comply with data standards set by the CFTC. Regulators hope having access to a central pool of trade information will enable them to better monitor systemic risk within the over-the-counter market.

Swap Execution Facility<br><br>

A "swap execution facility" is a trading system or platform, other than a designated contract market, in which multiple participants have the ability to execute and trade swaps. These organizations must comply with core Dodd-Frank and regulatory principles.

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Initial Margin<br><br>

The percentage of the purchase price of a financial instrument that can be purchased on margin that the investor must pay for with his or her own cash or marginable securities.

Variation Margin<br><br>

A payment made by clearing members to their clearinghouse when prices move against them on contracts they hold.

Price Alignment Interest<br><br>

Interest charged on the cumulative amount of variation margin received or interest paid on the cumulative variation margin that has been paid.

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Financial Product Markup Language<br><br>

A set of tags and fields in marking up documents or other records to describe complex financial products in a way that information on them can be exchanged over the Internet.

The protocol is based on XML (eXtensible Markup Language), the standard means for describing data shared between applications that run over the Internet.

Legal Entity Identifier<br><br>

A unique number that identifies an entity in the financial market. In effect, a “social security number” system for market participants that resolves who really is behind a transaction. The LEI helps fulfill a mandate from the Dodd-Frank Act to improve market integrity and transparency.

Legally Separated but Operationally Commingled<br><br>

A process where the identification of the swaps that have been completed between market participants are kept separate, so legal rights are clear.

However, operationally speaking, each clearing agent and clearinghouse would be permitted to combine or commingle the relevant collateral of multiple fund managers in one account.