When Over-the-counter (OTC) traders saw that the volatility led to funding and illiquidity issues withdrawal from the market was imminent. Based on the fact that price discovery was irrelevant once liquidity disappeared the policy reduces the danger of arbitrary valuation of securities with rules to benchmarking ‘soft’ options. This included the elimination of collateralized debt obligations, credit derivatives and municipal securities overnight.
Enactment of the Dodd–Frank Wall Street Reform and Consumer Protection Act [Pub.L. 111–203, H.R. 4173] in 2010 sought change to financial regulation. All U.S. federal financial regulatory agencies and the financial services sector fall under the new legislation. How securities are traded plays a critical role in price determination and stability. The Dodd-Frank Act is designed to address the risks that emerged in the OTC financial market that prompted illiquid valuation during the initial moments of the crisis. Recession proof your portfolio and click here to learn how to trade stocks
Dodd-Frank also aims to monitor and control abusive lending practices and high-risk trading of complex derivative securities that may threaten banking institution stability. Consumers also benefit from the Act in that reduction of financial fraud translates into fewer financial services fees. Continuous audit of public exchanges as a result of compliance with the regulation means that investors stand to recuperate.
The Dodd-Frank is similar to other major regulatory reforms in the European Union and elsewhere where trading has shifted from OTC to exchange markets. Higher capital requirements are transforming access to dealers. Other activities involve use of central clearing counterparties. Reporting of OTC transactions to the trade is also a substantial effort as a result of combined reform efforts.