Question

How is the Dodd Frank Act impacting OTC derivatives

Compare and contrast Credit Default Swaps and Asset Swaps

Answer 1

Answer(1): Dodd Frank Act- It is a customer protection act, enacted in 2010. It was created to limit risk and to increase accountability and transparency. It was created after the financial crisis of 2008.

Dodd Frank Act impacting OTC derivative- It proves a turning point in the regulation of the OTC derivative market. Dodd frank addresses regulation of OTC derivatives swaps by the commodity Futures trading commission (CTFC) and the security based Swaps by Securities and exchange commission (SEC). These regulations provide transparency and also reduce the risk in derivatives market.

Answer(2): Credit default swaps- It is a derivative instrument that allows an investor to offset his credit risk with that of another investor. It is for the purpose of transferring risk from one party to another. These are traded Over the counter (OTC).They exchange the cash flow.

Asset swaps- It is also a derivative instrument and used to reduce the risk but an actual asset is exchanged rather than cash flows. There are two parties in Asset swaps, A protection seller which receives cash flows from the bond and a swap buyer who hedges risk.