Financial regulation in the United States

The Dodd Frank Wall Street Reform and Consumer Protection Act (DFA) came into force on 21 July 2010. It made changes to the American financial regulatory environment that affected all federal financial regulatory agencies and almost every part of the nation's financial services industry.


Introduction to Dodd-Frank Derivative Market Reform

The Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) was enacted to reduce systemic risk, increase transparency, and promote market integrity within the financial system. In particular, Title VII mandates major structural reform to the Over-The-Counter (OTC) derivatives market. Title VI introduces changes to Bank Holding Company (BHC) regulation. The key areas of change in this area include the following:

  • Increased transparency
  • Enhanced risk management
  • Mandatory execution and clearing of covered products
  • Market integrity
  • Customer and counterparty protection

Title VII of the Dodd-Frank Act

Since the second half of 2012, swap market participants have experienced an unprecedented introduction of new regulatory requirements. Of particular note are those subject to the jurisdiction of the Commodities Futures Trading Commission (CFTC). These new CFTC requirements include:

  • Registration of Swap Dealers and Key Market Participants
  • Swap Data Reporting (including publicly available Real Time Reporting)
  • Clearing Mandate and the phase-in over 270 days during 2013 of certain classes of Interest Rate and Credit Default Swaps covered by the rule
  • Industry-wide documentation requirements between Swap Dealers and their clients to conform with Internal and External Business Conduct Standards
  • Introduction of Confirmation Timeliness Requirements for market participants
  • Introduction of Portfolio Compression and Reconciliation requirements
  • Registration of Swap Execution Facilities (SEFs) and corresponding membership process by market participants in preparation for the Execution Mandate
  • Implementation of the CFTC's Cross Border Guidance and changing definition of scope of market participants considered within the scope of the regulation
  • Commencement of the phase-in of mandatory SEF execution for products deemed Made Available to Trade (MAT)

2013 closed with the CFTC's issuance of Substituted Compliance determinations for the six major jurisdictions (Europe, Hong Kong, Japan, Canada, Australia, and Switzerland). The pipeline for 2014 is equally as aggressive as the final set of CFTC rules, including Segregation of Initial Margin rules, comes into effect. We also expect the Securities Exchange Commission (SEC) to release its rules on how Title VII applies to the security-based swaps market. The SEC rules will likely apply many of the same entity and transactional level rules that currently apply to CFTC regulated swaps to security-based swaps.

NB: The Dodd-Frank rules apply to all clients dealing with US swap dealers such as HBUS. Generally, clients trading with non-US swap dealers such as HBEU are only impacted by Dodd-Frank if the client is considered a ‘US Person’. Non-US Persons that benefit from a US Person swap guarantee and ‘affiliate conduits’ may also be subject to certain Dodd-Frank transaction-level requirements.

Broad Interpretation of the Term ‘US Person’

Under the final Guidance, the CFTC’s interpretation of the term ‘US person’ would generally encompass: (1) persons (or classes of persons) located within the United States; and (2) entities that may be domiciled in the United States or entities that operate outside the United States with swap activities that have a "direct and significant connection with activities in, or effect on, commerce of the United States."

This definition is somewhat wide-ranging and clients are advised to pay close attention to the various interpretations of this definition in the rules.

For a detailed breakdown of what Dodd-Frank deems a ‘US Person’ to be, please see pages 11 to 13 of the CTFC’s Chapter I, Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations; Rule’, dated 26 July 2013.

Protecting the customer

The Dodd Frank External Business Conduct rules have been designed to protect customers throughout the transaction life cycle. In particular, they are intended to educate the customer on trade risks through the delivery of critical pre-trade information, for example, material risks, conflicts disclosures and trade characteristics. In addition, they provide protection to customers from fraudulent, deceptive and manipulative practices.

Please see the ‘Business Conduct’ tab of our Dodd-Frank round-up for further information.

Segregation of Independent Amount (or ‘Initial Margin’)

In November 2013, the CFTC published final rules implementing requirements for swap dealers such as HSBC to notify relevant counterparties of their right to require segregation of margin (other than variation margin) for uncleared swap transactions. This new regulatory requirement under Title VII of the Dodd-Frank Act, requires HSBC to, among other things:

  • Obtain confirmation of receipt by the appropriate officer of the counterparty;
  • Obtain counterparty’s elections whether or not to require segregation of collateral; and,
  • Provide a notice at least once each calendar year to the Officer responsible for the management of collateral in your organisation (or suitable alternative).

For further information, please visit ISDA Amend to match with the appropriate HSBC entities and provide the information and elections, if you have not done so already. The Election Notice and JP Morgan Fee Disclosure can be accessed using the links below.

Improving ‘Know-Your-Customer’ and Trading Procedures

In order to trade derivatives products, HSBC must adhere to high-level Know Your Customer (KYC) standards and uphold strict rules for trading relationship documentation, the timely confirmation of trades and the reconciliation of portfolios.

HSBC has adopted a proactive approach to financial regulation compliance and KYC observance.

The Final Rules Regarding Business Conduct Standards for Swap Dealers and Major Swap Participants Dealing with Counterparties can be viewed on the CFTC website.

Last updated: 3 July 2014


Dodd-Frank in Action: New Rules to bring about greater Market Transparency

Real Time Over-The-Counter (OTC) derivatives trade reporting provides greater visibility to regulators and the public.

The Dodd-Frank Act requires real-time reporting of interest rate and credit, certain Foreign Exchange (FX), Equities, and Commodities transactions. Under the US Treasury Exemption, FX Swaps and Forwards are exempt from the Real Time reporting rules.

NB. The CFTC have issued a Final Rulemaking on Procedures to Establish Appropriate Minimum Block Sizes for Large Notional Off-Facility Swaps and Block Trades.

How SEFs and DCMs are bringing greater market transparency

Regulated platforms, Swap Exchange Facilities (SEFs) and Designated Contract Markets (DCMs), bring increased pre-trade price transparency into the swaps market as they provide the public with the price and volume of every transaction in real time, allowing anyone in the market to compete and offer to buy or sell a swap and communicate that to the public.

Beginning on 15 February 2014, certain Interest Rate and Credit Default Index swaps have become subject to CFTC Made Available to Trade (MAT) Determinations. In practice, this means that all swaps that are subject to a MAT determination must be executed through a DCM or a SEF.

The new Weekly Swaps Report

The regulatory agencies charged with implementing Dodd-Frank, have issued several new initiatives designed to protect consumers and make markets more transparent, in line with the original G20 guidance. Most prominent among these was the initiation of the CFTC Weekly Swaps Report, aimed at providing the public, for the first time, with a detailed view of the swaps marketplace.

  • Today’s report currently covers the interest rate and credit asset classes that comprise about 90% of the approximately US$400 trillion swaps market. The report provides three views of the swaps market: the gross notional outstanding value, the weekly transactions measured by dollar volume, and the weekly transactions measured by ticket volume. The CFTC Swaps Report Data Dictionary provides definitions for each asset class, and the Swaps Report itself provides detailed breakdowns of the swaps market by product type, currency (six major currencies), tenor, participant type, and whether swaps are cleared or uncleared.

“Due to Dodd-Frank reform, the public now will benefit each week from a detailed window into the trading of the swaps market,” said former CFTC Chairman Gary Gensler.

The CFTC Swaps Report is published every Wednesday at 3:30 p.m.

Last updated: 24 February 2014

Business conduct

Risk Management and Control Enhancement

The Dodd-Frank Act’s Internal Business Conduct rules require Swap Dealers (SDs) and Major Swap Participants (MSPs) to establish risk management procedures adequate for managing their day-to-day business. The final rule requires swap dealers and major swap participants to establish a risk management program consisting of written policies and procedures designed to monitor and manage the risks associated with their swap activities. Under the final rules, the risk management program must take into account:

  • market risk
  • credit risk
  • liquidity risk
  • foreign currency risk
  • legal risk
  • operational risk
  • settlement risk, and
  • all other relevant risks

The final rules also require that swap dealers and major swap participants maintain polices for monitoring their traders throughout the trading day for compliance with established trading limits and require traders to follow established procedures for executing and confirming transactions. The rules also require diligent supervision of traders and separation of traders from the risk management unit.

Confirmation timeliness and reconciliations

Section 731 of the Dodd-Frank Act added a new section to the Commodity Exchange Act (CEA), which requires the Commission to prescribe standards for SDs and MSPs related to the timely and accurate confirmation, processing, netting, documentation, and valuation of swaps. These regulations set forth requirements for swap confirmation, portfolio reconciliation, portfolio compression, and swap trading relationship documentation for SDs and MSPs. These requirements took effect during 2013.

Under these rules, SDs and MSPs must adhere to certain standards for the maintenance of swap trading relationships documentation for all trading counterparties. Documentation of swaps is viewed as a critical component of the swaps market and has been the focus of significant domestic and international attention in recent years.

SDs and MSPs are now required to adhere to certain standards for the timely and accurate confirmation of swap transactions and for the reconciliation and compression of swap portfolios. Confirmation, portfolio reconciliation, and portfolio compression have been recognised as important post-trade processing mechanisms for reducing risk and improving operational efficiency. The specific confirmation, reconciliation, and compression obligations required by the final rules vary, depending upon the number of transactions and whether the particular swap transaction or portfolio is between an SD and MSP, or involves other types of counterparties.

Please refer to the CFTC factsheet, ‘Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants’ for further information.

The External Business Conduct Rules and Protecting the Customer

The Dodd-Frank External Business Conduct rules have been designed to protect customers throughout the swap transaction life cycle. In particular, they are intended to inform and educate customers on the risks associated with entering into swap transactions. This is accomplished in part through the delivery and execution of critical pre-trade documentation that describes a swap dealer’s obligations concerning the disclosure of conflicts, material economic terms and product characteristics. In addition, the rules provide protection to customers from fraudulent, deceptive and manipulative practices. The final rules prohibit SDs and MSPs from disclosing and otherwise misusing a counterparty’s material confidential information.

These rules also require disclosure of material information to counterparties prior to entering into a swap as well as necessitating that SDs/MSPs perform enhanced due diligence relating to counterparties designated as special entities (defined below). Certain External Business Conduct rules do not apply to transactions initiated on a Swap Execution Facility (SEF) or Designated Contract Market (DCM) when the SD/MSP does not know the identity of the counterparty prior to execution.

These rules specifically address:

  • Swap dealer duties to all counterparties
  • Swap dealers acting as advisors to Special Entities
  • Swap dealers and major swap participants acting as counterparties to Special Entities
  • Political contributions by swap dealers
  • Means of compliance with business conduct standards
  • Regulatory Intersections

The principal requirements for Swap Dealers and Major Swap Participants dealing with counterparties, under the final rules are:

  • Verification. SDs/MSPs must verify that the counterparty is an Eligible Contract Participant (ECP) as defined in Section 1a(18) of the CEA and whether the counterparty is a Special Entityi.
  • Disclosures of Material Information. SDs/MSPs must disclose information concerning the swap in a manner reasonably designed to allow the counterparty to assess the material risks and characteristics of the swap and the material incentives and conflicts of interest that the SD/MSP may have in connection with the particular swap.
  • Scenario analysis. As part of the duty to disclose the material risks of a swap, prior to entering into a swap that is not made available for trading on a Designated Contract Market (DCM) or Swap Execution Facility (SEF), an SD (but not MSPs) must notify its counterparty of its right to request and consult on a scenario analysis for the swap.
  • Daily mark. For uncleared swaps, SDs/MSPs must provide counterparties with a daily mark reflecting the current price of the swap.
  • Communications—fair dealing. SDs/MSPs must communicate with their counterparties in a fair and balanced manner based on principles of fair dealing and good faith.
  • Recommendations to counterparties—institutional suitability. For swap counterparties who have not executed a safe harbour or have opted out, a swap associated person who recommends a swap or trading strategy involving a swap must conduct heightened due diligence to ensure that the counterparty understands the potential risks and rewards of the recommendation or strategy and has a reasonable basis to believe that the recommendation is in the best interest of the counterparty.

NB: Prior to entering into a DFA Covered Transaction, please be sure to review our risk disclosures and HSBC's Mid-Price disclosure below:

DFA Disclosure

DFA Mid-Price

For a detailed breakdown of the new regulation, please visit the US Commodity Futures Trading Commission website.

i Special Entities: Swap Dealers and Major Swap Participants have also to satisfy additional requirements when their counterparty is a ‘Special Entity’ (Under the final rules, Special Entities are governmental entities; employee benefit plans subject to Title I of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002) (ERISA); governmental plans defined in Section 3 of ERISA; any other employee benefit plan defined in ERISA that elects to be a Special Entity; and any endowment).

Last updated: 16 June 2014


Dodd-Frank Act - Clearing and Trading Requirements

Dodd-Frank amended the Commodity Exchange Act (CEA) to require mandatory clearing of certain swaps. A swap will be subject to ‘mandatory’ clearing if a clearing house offers the product for clearing and the Commodities Futures Trading Commission (CFTC) has issued a clearing determination that includes such a swap.

The clearing requirement has been phased-in since September of 2013. All counterparties who do not qualify for an exemption, exception or other relief from the clearing requirement must clear trades subject to the CFTC’s clearing determination.

The clearing requirement was phased-in over the course of 2013. Since September 2013, all counterparties who do not qualify for an exemption, exception or other relief from the clearing requirement must clear trades subject to the CFTC’s clearing determination.

The swap classes that are currently required to be cleared can be found on the CFTC asset class breakdown document.

How has the Dodd-Frank clearing requirement impacted the Swaps market?

Many market participants are now required to begin clearing certain index Credit Default Swaps (CDS), Interest Rate Swaps (IRS), Fixed-to-Floating Swaps, Basis Swaps, Forward Rate Agreements and Overnight Index Swaps that they enter into. The clearing requirement applies to newly executed swaps and significantly amended swaps, as well as to changes in the ownership of a swap.

The CFTC will determine whether a swap is required to be cleared after either a CFTC-initiated review or a submission from a Derivative Clearing Organisation (DCO). Non-financial entities hedging commercial risk benefit from an exception to the Dodd-Frank clearing requirement provided they meet the conditions as defined in the CFTC’s Rulemaking on the End User Exception.

When the CFTC announced the commencement of the mandatory reporting requirement on 11 March 2013, the then CFTC Chairman, Gary Gensler, stated: “One of the most significant Dodd-Frank reforms begins implementation today. Central clearing lowers the risk of the highly interconnected financial system. It promotes competition in and broadens access to the market by eliminating the need for market participants to individually determine counterparty credit risk, as now clearing houses stand between buyers and sellers.”

Swaps statistics can be found on the LCH.Clearnet website.

For further information on Dodd-Frank’s clearing requirements, please visit the CFTC website.

Last updated: 27 July 2017

Volcker Rule

The Volcker Rule

The objective of the Volcker Rule is to stop all proprietary trading (which is defined quite broadly) by commercial banks (such as HSBC) i.e. to cease any risky trading by banking institutions that has no benefit to its customers. It also seeks to prevent the requirements being by-passed by ownership/investment in hedge funds or private equity funds.

The Volcker Rule ("The Rule") is section 619 of the Dodd-Frank Act (DFA) and the implementing regulations that imposes a number of restrictions on banking entities, most notably the prohibition of proprietary trading. The Rule is required to be implemented by 21 July 2015.

What are the key aspects of the Volcker Rule requirements?

The final rules broadly prohibit banking entities from:

  • Engaging in short-term proprietary trading of specific financial instruments for their own account.
  • Owning, sponsoring, or having certain relationships with hedge funds or private equity funds, and certain other investment vehicles "Covered Funds".


  • The final rules became effective on 1 April 2014 but with an implementation time period. Between 30 June 2014 and 31 December 2016, banking entities with consolidated trading assets and liabilities of their US operations ranging from USD 10bn upwards will be required to report quantitative measurements. Reporting will be phased in with the first wave reporters beginning in September 2014. HSBC will begin reporting in April 2016.
  • Beginning 30 September 2015, regulators will review metrics and refine the strategy.


As required by section 619 of the Dodd-Frank Act, the final rules, adopted under the Bank Holding Company Act, provide exemptions for certain activities, which include, market making, underwriting, hedging, trading in certain government obligations and organising and offering a hedge fund or private equity fund.

Further Volcker information can be found on the Federal Reserve website

Last updated: 20 May 2014