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On Thursday 29th March 2012 Lombard Risk held the 1st in a series of four webinars on Dodd-Frank Act Title VII issues impacting the swap reporting market.
The 4-part online webinar series comprises:
1st in series: “Dodd-Frank Act impact on swap market”
A copy of the PowerPoint presentations is available upon request. Email Marketing@LombardRisk.com or Rebecca.Bond@LombardRisk.com
2nd in series, 31st May 2012: “Dodd-Frank Act Title VII: STEP-BY-STEP ANALYSIS of the implications of Title VII of the Dodd-Frank Act on swap dealers, major swap participants and eligible contract participants. WHAT YOUR FIRM NEEDS TO DO, BY WHEN. ”
3rd in series, 28th June 2012: “Major technological challenges in Dodd-Frank Title VII compliance”
The event was extremely well attended by a combination of business and IT specialists from financial institutions around the world.
Through an online poll, over half of the audience indicated that they were “Swap Dealers” or “Major Swap Participants”. Other ‘categories’ were: Financial Entity, Commercial end-user and 3% did not consider themselves to be any of these.
Approximately 2/3 of the audience were in the United States or England, others joined from Australia, Canada, India, Ireland, Mexico, Netherlands and Singapore – proving that this is a GLOBAL regulation, perhaps focused predominately on the United States because of the Dodd-Frank Act, but EMIR and MiFID2 is on the horizon.
The event commenced with “Welcome and opening remarks” from Rebecca Bond, Group Marketing Director – together with Margaret Bailey, Managing Director of Lombard Risk’s Americas division.
The key presentation, explaining the CFTC and SEC regulations and how they will impact financial institutions, was given by Gavin McConville, Business Matter Expert, Lombard Risk
Title VII of the Dodd-Frank Act – Wall Street transparency and accountability – Regulation of OTC swaps market
Mr Gavin McConville explained how the two regulators – the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) – were defining a swap reporting regime to collect data from financial institutions for real-time public dissemination as well as confidential regulatory use.
The reporting regime will provide price and volume transparency as well as market oversight in order to enforce position limits and track systemic risk. This regulation is being supported (signed by President Barack Obama in July 2010) to prevent a reoccurance of the ‘financial crisis’.
Who it impacts
One of the main differences between the two regulators’ demands was made apparent by the “Product Criteria for Reporting”, showing how the CFTC had identified 11 products to be included (Interest rate swaps, Forward rate agreements, Basis swaps, Cross currency swaps, Credit default swaps, Total return swaps, Swaptions and exotics, Rate floors caps and collars, Commodity based swaps, Swaps based on government securities and “broad” index-based equity derivatives), compared to the SEC’s 2 (Single name credit default swaps and “narrow” index-based equity derivatives).
A significant part of the presentation was dedicated to explaining the two regulators’ requirements, starting with the CFTC rules: Part 43 and Part 45 – for real-time reporting and public dissemination of swap transaction and pricing data and non-real time reporting of swap data for public dissemination.
Part 45 relates to non-real-time reporting of data at the time of the swap being created AND for the duration of the swap. The Swap Creation Data involves Primary Economic Terms (PET) and Confirmation Data, whilst the Swap Continuation Data is related to Valuation, State, Live cycle events and Contract-intrinsic events.
There is a strong focus on the REAL-TIME element of the reporting or, as it has been defined, “as soon as technologically practicable” for swaps executed on and off the swap market. The SEC has defined real-time as above, but added a caveat of “in no event later than 15 minutes after the time of the execution”.
Mr McConville explained the level of detail required in the reports: between 31 and 39 data fields are involved in the CFTC Part 43, and 12 categories of data for the SEC 901(c) and 9 for (d).
He also stressed how short the deadlines are: 16th July 2012 for Credit and Rates asset classes, and 3 months later for Equities, FX and Commodities. All asset classes must be reported upon by January 2013 (9 months away).
A question raised both in advance of the webinar AND through the live Q&A panel was in relation to the compliance dates. What are they (explained above) and how likely are they to be upheld?
Lombard Risk have been working with several major institutions on Dodd-Frank solutions in the United States and they are taking these deadlines very seriously – working towards having a tactical solution in place by then, with a view to grow them into strategic solutions thereafter.
The audience was polled: “What aspect of the Dodd-Frank Act Title VII reporting to you deem to be THE MOST CHALLENGING?”
- Creation/transmission and receipt of Unique Swap Identifiers
- Handling/transmission of end-user clearing exemption reports
- Real-time transmission?
- Transmission of Part 45 event-driven reporting
And the split was about even on A and B indicating that firms are most concerned with in- and out-bound communication of ad-hoc requests.
The final question posed to the audience was related to how their organisation was approaching satisfying the reporting requirements as set out under Title VII of the Dodd-Frank Act – and the answers indicated that every avenue was being explored: augmenting in-house IT infrastructure; engaging 3rd party solutions; migrating the business model to clear and execute all swap transactions on platform to mitigate reporting responsibilities – as many chose the option D “A combination of …”.
Questions raised by the audience
Two questions had been submitted in advance – the first relating to whether the deadlines would be delayed (we think not), and the other looking at whether this was a US regulation. Again, we think not – there is EMIR and MiFID2 underway in Europe – but also, the swaps that are impacted by this regulation are defined as those defined on the previous page. Which seems ‘all encompassing’, however Mr McConville illustrated this with a scenario whereby:
“an English trader, working for a French bank, is on holiday in America, when he pops into his US branch to finalise a trade between an Italian and Swiss company” – the fact that no entity is in any way “American” means nothing, just the fact that the trader was in America, and it was therefore executed in America, meant it was included in the regulatory definition.
The 2nd question illustrated the importance of employing a rule-based solution to meet the complexities of in-house operations and systems. “If my firm uses a range of tools for valuation, how will the reporting application know which figure to use?”. This can of course be catered for by user-definable ‘rules’.
Another delegates asked whether SEFs/DCMS can report swap continuation data? Yes, if the swap was executed on a SEF/DCM they CAN report continuation data on behalf of the reporting counterparty – however, the reportint counterparty STILL has an obligation to provide sufficient information TO the SEF/DCM to facilitate this.
Dodd-Frank style swap reporting has global impact – EMIR, MiFID2
Lombard Risk Dodd-Frank act solution
Lombard Risk has been working with several major US financial institution in relation to Dodd-Frank – and has developed an “out of the box” Dodd-Frank Swap data reporting solution to meet the regulators’ requirements. Below is a high level ‘dashboard’ and basic workflow of the solution:
The Lombard Risk solution key features include:
Regulatory expertise of Lombard Risk
- “Out-of-the-box” Dodd-Frank Act (Title VII) solution
- Fully configurable
- System agnostic
- Connectivity (to SEFs, SDRs)
- Scalable to meet future regulatory changes
Action timetable: WHAT AND WHEN
16th July 2012 for Credit and Rates (or 60 days after publication of the Commission’s final rule defining the terms “swap dealer” and “major swap participant”)
16th October 2012 – for Equities, FX and Commodities (or 90 days after compliance date for Credit and Rates – see above).
12th January 2013 – all asset classes
Next in the series – 31st May 2012