Korea Capital Market Institute

This report explores how OTC derivatives regulations have evolved in the U.S. and focuses on how the Dodd-Frank Act changes regulation of the U.S. derivatives market. Then, the possible effects to the Korean derivatives market are discussed. The Anti-Gold Futures Act of 1864 was the first enactment of U.S. derivatives regulations. In 1936, the Commodity Exchange Act was enacted and established a framework for derivatives regulations. As a result of the Commodity Futures Trading Commission Act, the Commodity Futures Trading Commission (CFTC) was created in 1974 and given responsibility for regulating the U.S. derivatives market. Before the enactment of the Commodity Futures Modernization Act of 2000 (CFMA), it was understood that futures should be traded on designated contract markets. Hence, OTC derivatives trading might have been considered illegal to some. This regulatory uncertainty was removed by the CMFA which clearly states that OTC derivatives transactions will not be regulated if they are privately negotiated and executed by eligible contract participants. The OTC derivatives legislation within the Dodd-Frank Act will give authority to the CFTC and the Securities Exchange Commission (SEC) to regulate the OTC derivatives market. Regulations cover mandatory clearing through clearing houses, reporting to trade repositories, and trading on organized markets. And dealers and major market participants in the OTC derivatives market are required to register, hold sufficient capital and collateral to meet regulatory requirements, and conform to business conduct standards. With the enactment of the Dodd-Frank Act, the U.S. has started to implement sweeping OTC derivatives regulations for the first time. The OTC derivatives regulations under the Dodd-Frank Act may have some impact on the Korean financial market, such as a contraction in OTC derivatives trading and changes in market practices. In particular, Korean banks` branches in the U.S. and cross-border transactions might be affected. However, the direct impact of the Dodd-Frank Act on the Korean financial market will not be significant. The OTC derivatives regulations of the Dodd-Frank Act implement the G20 agreements. Given that, the Korean regulatory framework is also likely to change for the sake of international cooperation. In that case, large repercussions from the reform of the Korean regulatory framework for the OTC derivatives market can be expected.