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Derivatives allow users to protect against everything from moves in interest rates to the cost of raw materials, and swaps are more complex derivatives that have generally been traded away from exchanges.
As of June 10, many more are being routed to central clearinghouses, which take fees to guarantee trades in the nearly $650 trillion global swaps market. The 2010 Dodd-Frank financial overhaul law mandated that many swaps be cleared in an effort to help prevent a financial system meltdown by forcing traders to post collateral known as margin. June 10 wasn't the first clearing deadline under Dodd-Frank, but the implemented rules apply the clearing requirement to many more firms, and the industry has been preparing for the changes for several months. A rule that took effect in March covered dealers and about 40 funds that are heavily active in swaps.
Analysts say the new approach to clearing swaps brings its own risks. Clearinghouses are large and complex entities backed by their members, primarily units of securities dealing banks that act as clearing brokers on behalf of traders.
Clearing also will be costly. As firms set aside more cash and assets, such as US Treasurys, as collateral to clear their swaps, liquidity in the financial system could become slightly constrained, say analysts.