The Dodd‐Frank Act and Counterparty Credit Risk

This chapter explores Title VII of the Dodd-Frank Act, which heavily regulates over-the-counter (OTC) derivatives markets. It focuses on historical data of the notional outstanding, gross market value, gross credit exposure, and collateral associated with OTC derivatives markets. The chapter then explores how Title VII of the Dodd-Frank Act works to reduce the counterparty exposure faced by participants in the OTC derivatives market through setting mandatory clearing and other requirements. It distinguishes between notional outstanding, gross market value, gross credit exposure, and collateral. The chapter shows the degree to which OTC derivatives markets are characterized by counterparty exposure. It explains the evolution of the U.S. regulatory approach toward OTC derivatives. The chapter describes key provisions of Title VII of the Dodd-Frank Act. It discusses criticism of Title VII. Title VII refers to OTC derivatives as either "swaps", "security-based swaps", or "mixed swaps".