There is a widespread perception that the lack of effective regulation of the worldwide over-the-counter derivatives market contributed greatly to the financial crisis. The Act responds to this in various different ways.

The most important change is a requirement that swaps be cleared through a centralised clearing house. This rule will apply not only to swaps effected in the US, but also to those effected outside the US which are considered by US regulators to have a significant impact on US commerce. It remains to be seen how broadly the US regulations will be applied extraterritorially.

There are two important exceptions to the centralised clearing requirement:

The swaps market is a global market and is used not just by speculators but also by companies seeking to hedge legitimate commercial risks. The main implication of this part of the legislation for UK companies is that their hedging activities may become more expensive and more difficult to execute than before, and in some cases, the range of available bank counterparties may be limited to those outside the US.

Many UK companies make use of the global securitisation market as a financing tool. Once the Act comes into force, US banks and financial firms will face additional requirements relating to any securitisations they underwrite. In particular, they will be required to retain an economic interest (generally at least 5%) in the credit risk which is being securitised (this is referred to as the "skin-in-the-game" requirement). There will also be additional disclosure requirements.

Non-US companies will not be subject to either the skin-in-the-game or the additional disclosure requirements. The competitive landscape for securitisations is likely to change as a result, and in some cases, they are likely to become more expensive for issuers throughout the world as arrangers seek to fund the risks they will be obliged to retain.

At the same time, the Act provides for additional regulation of credit rating agencies such as Moody's and Standard & Poors. A new office within the US Securities and Exchange Commission, the Office of Credit Ratings, will regulate these entities. They will be subject to enhanced civil liability if they provide ratings without doing adequate research or due diligence.

Since credit rating agencies operate on a worldwide basis, one effect of the legislation is likely to be a more rigorous and time-consuming process for obtaining credit ratings for all issuers, whether in the US or elsewhere.

One key element of the Act is the so-called "Volcker rule", proposed originally by former Federal Reserve chairman, Paul Volcker. This prohibits US banks from engaging in proprietary trading and from owning or sponsoring private equity or hedge funds, subject to certain exceptions. There is no requirement for immediate divestment of such activities, and forced divestments may not be required for up to 12 years from now, but US banks may well look for opportunities to divest these activities sooner than that on a voluntary basis (for example, it has been widely reported that Goldman Sachs is planning to divest its proprietary trading unit).

Another key element of the legislation is enhanced supervision and control of US banks and other financial firms that are considered "systemically important". This, along with increased capital requirements for all US banks, may in turn lead to pressure on US banks and financial services companies to divest activities which are considered "non-core" and which carry higher capital costs.

For UK companies, particularly those with private equity shareholders, this may lead to a change in control of those shareholders and, in the longer term, changes in shareholder expectations and objectives. Banks and other US financial firms may turn to the UK and European private equity markets for additional capital and this may offer non-US investors attractive long-term investment opportunities. More importantly, there may be significant opportunities to acquire activities which US banks are required to, or may decide to, divest as a result of the legislation.

The Act makes several significant changes to the corporate governance regime applicable to US companies. Many of these, such as the requirement for a non-binding vote on the remuneration of executives and disclosures about the roles of chairman and chief executive, are already familiar to UK companies and have become an accepted part of UK corporate life.

UK companies may, however, expect some other aspects of the US legislation to affect best practice in the UK, if not the UK Corporate Governance Code itself (see feature article "New UK Codes: corporate governance takes centre stage", this issue). For example, the Act requires that:

The full implications of this massive legislation will become apparent over the next few months as detailed rules are issued. The financial markets around the world are so interconnected that the changes made in the US are bound to affect users of all financial markets, not just those who are active in the US market itself.