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How does the Dodd-Frank law regulate the financial industry?

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Quick Answer

The Dodd-Frank Wall Street Reform and Consumer Protection Act aims to reform the regulation of swaps. Lack of regulation in this area led to the financial crisis of 2008, which made clear the need for reform, according to the U.S. Commodity Futures Trading Commission.

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How does the Dodd-Frank law regulate the financial industry?
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Full Answer

The aims of the Dodd-Frank Wall Street Reform and Consumer Protection Act can be divided into three broad areas. Firstly, the law regulates swap dealers. The Dodd-Frank Act requires dealers to meet certain bookkeeping and reporting requirements so that oversight can be maintained, according to the U.S. Commodity Futures Trading Commission. In its second purpose, the law is designed to increase transparency and to increase competition in pricing. To that end, standardized derivatives are required to be traded on regulated exchanges or swap execution facilities.

Its third goal is to lower the risk to the American public. To achieve this goal, the Dodd-Frank act calls for the establishment of clearinghouses, which act as middlemen in swaps and assume the risk associated with these sorts of exchanges. Clearinghouses have been used in the futures marketplace for over a century, and the Dodd-Frank Act brings a similar system to the swaps marketplace, as the U.S. Commodity Futures Trading Commission explains. The legislation's writers and advocates hope that these reforms lessen the risk of another collapse in the U.S. economy.

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