Let’s face it. Swaps are complicated. Few outside the financial industry fully understand them but they are an integral part of the financial and investment industry. The basic definition of a swap is “the exchange of one set of cash flows for another.” It is a future commodity, in which one party seeks to derive a benefit from an existing interest rate in a loan deal based upon what the interest rate may be on a future date. If the party is correct, it is deemed to be “in the money” and obtains a cash benefit. If incorrect, then the party will not, and be deemed to be “out of the money.”
Swaps are traded in the marketplace, though not on any well-known exchange, and oversight of the swaps marketplace falls to the Commodity Futures Trading Commission (“CFTC”). When the financial markets melted down, Congress passed several laws in an attempt to provide greater transparency in the financial sector, especially dealing with those markets that, at that time, were not regulated and scrutinized. One of those laws, and perhaps the most well known, was the “Dodd-Frank” legislation, which was passed in 2010. Of the many things Dodd-Frank did, it required more transparency in, among, and between financial institutions and, ultimately, investors. As a result, heretofore protected names and identities of investors purchasing swaps suddenly became available and known once a swap was purchased. The unintended result of this “name give-up” is that the swap markets have slowed. Investors fear that losing their anonymity could result in damage to their business by letting competitors see their investment and trading strategies.
As a result, the CFTC has indicated that it will be “looking into” the “name give-up” requirement. If reversed, the swap market could pick up, which would aid the marketplace but any changes to the current lack of anonymity will take time. See the following link for more information: http://goo.gl/UtLtRu
For more information about this topic or any others, please contact Ronn Steen. He can be reached at (615) 465-6010 or by email at [email protected]