An Interpretation of the “Hedge or Mitigate Risk” Criteria and the Impact to Compliance with the Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was the primary federal policy response to the financial disruption that affected the world economy in 2008. The Act was passed in July 2010, and included in its many provisions was Title VII, which addressed derivative activity.
The Dodd-Frank Act authorizes and directs the Commodity Futures Trading Commission (“CFTC”) to extend its regulatory oversight to over-the-counter derivatives and swaps. For more than two years, the CFTC has worked to build a regulatory framework to oversee derivative/swap trading and regulate the entities subject to the Dodd-Frank Act once this law is implemented.
This whitepaper provides an organized discussion of the relevant potential implications of having swaps activities meet the various definitions of hedging activity and explores the types of activities that entities may assert are hedging activities within the rules published by the CFTC. We describe a framework for consideration in implementing the hedging-related rules established by the CFTC, and discuss relevant potential implications and practical applications of specific rules approved or proposed by the CFTC addressing hedging.
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