Swap futurization

Abstract

Purpose – The purpose of this paper is to demonstrate that certain rules, implemented as a result of the Dodd-Frank Act (DFA) of 2010, should be harmonized between economically equivalent products in swap and futures markets to prevent regulatory arbitrage. Design/methodology/approach – The paper focuses on rules surrounding margin requirements and block size thresholds. As such, a background of clearing and exchange systems is presented to familiarize the reader with the risk management objectives of the regulation. Viewpoints of several leading commentators taken from a Commodity Futures Trading Commission roundtable and comment letters are then analysed to support the argument that margin requirements and block size thresholds should be the same for similar financial products. Findings – Based on the review and analysis of several commentators and industry participants, harmonization of rules for swaps and economically equivalent futures contract should be achieved to prevent regulatory arbitrage. Originality/value – To the best of the author's knowledge, there are no articles that address the swap futurization debate in this detail. This paper will be of interest to readers who would like to learn more about how the DFA has impacted the derivatives market leading to the recent trend of swap “futurization”. It is also ideal for those who are unfamiliar with current clearing and exchange systems, as it presents background detail of this framework to supplement the debate on swap rules.