Derivatives Clearing Organization

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A Derivatives Clearing Organization (DCO) is a system or organization that enables parties to a transaction to substitute the credit of the clearing organization for the credit of the parties. It provides for multilateral settlement or netting of obligations or otherwise provides clearing services to mutualize or transfer credit risk from such transactions among participants in the clearing organization.[1] The term Derivatives Clearing Organization was defined under the Commodity Futures Modernization Act of 2000 (CFMA).


DCOs and the Dodd-Frank Act

Among the mandates of the Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) are several requirements regarding DCOs. These mandates are, according to a summary from the Senate Banking Committee, designed, in part, to "create a sound economic foundation, protect consumers, and prevent another financial crisis."[2] The CFTC has issued several rule proposals related to DCOs, including:

  • Financial resource requirements for derivatives clearing organizations and "systemically important" derivatives clearing organizations (SIDCOs);
  • The process for mandatory clearing of swaps;
  • Core principles, procedures, and definitions; and
  • Governance, conflict of interest mitigation, and risk management requirements.[3]

References

  1. Derivatives Clearing Organizations. CFTC.
  2. Brief Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act. U.S. Senate Banking Committee.
  3. Dodd-Frank Rulemaking Areas. CFTC.