Dodd-Frank Trade Reporting isn’t coming … it’s here. February 28, 2013 was the date that Major Swap Participants (MSPs) were required to begin reporting equity, foreign exchange and other commodity swaps. And this is just the beginning of a series of milestones in the regulation that was designed to prevent future “too big to fail scenarios,” such as what occurred during the Global Financial Crisis of 2008. But, there is a bigger story here around regulation and compliance and how IT is used to ensure transparency, accuracy and accountability in reporting.
Regulation, Regulation and more Regulation
While Dodd-Frank is a U.S. regulation under the supervision of the Commodities Futures Trading Commission (CFTC), any financial institution doing business with a U.S. bank will need to comply. Hot on the heels of Dodd-Frank is a regulation in Europe called EMIR, the European Market Infrastructure Regulation, which applies to members of the European Union. EMIR is phasing in during the latter half of 2014 and like Dodd-Frank will require trade reporting for Over the Counter (OTC) Derivatives. Although U.S. requirements specify same day reporting, the European version will be a T+1 implementation.
Regulation is being specified across many parts of the world by the countries that are members of the Group of 20 (G20) global economic and financial initiative.
There are four main themes associated with this regulation:
- market transparency
- systemic risk
- regulatory complexity
- straight-through processing.
Each of these four themes will have an impact on business and will require changes in technology to support them.
- Market transparency improvements will be stressed by the expected migration of OTC trading relationships to electronic venues and increasing trade volumes. IT will have a capacity planning challenge as it plans to handle vast data volumes at the same time as delivering the transparency required by the business.
- Systemic risk reduction will require greater connectivity and aggregation of data from multiple locations by IT in order to support the business’ requirements for increased capital, clearing and margin.
- Regulatory complexity will grow as more jurisdictions come into play and the onus will be on IT to implement a rule-based approach to ensure that the right dealers are cleared with the appropriate regulator.
- Straight through processing will demand more efficiency from the business as IT handles the movement from batch to real-time at the same time the reporting windows continue to shrink.
So what you need to do
It’s back to the three “R”s. The first “R” corresponds to real-time monitoring of trading activities. You will need to ensure that your firm complies with regulatory obligations and be able to follow up on all reporting errors and false positives, as fast as technologically possible. The second “R” is about reconciling positions across all legal entities. This means reporting and preventing problems such as over, under and misreporting. The final “R” handles responding to requests for information from regulators about issues that impair operations, trading or other critical functions. This necessitates a real-time and historical query function for the business to search for swaps that meet certain criteria.
Swap dealers are required to report all Swaps to a Swap Data Repository (SDR) within 30 minutes of execution and when trades are rejected, they must be corrected and resubmitted within that same time span. The challenge for these organizations is to ensure compliance and detect potential breaches in responsibility before they happen. The situation increases in complexity as EMIR goes live. Multinational banks will need to comply with both sets of regulations. These banks will need real-time visibility in order to overcome these continuously evolving challenges.
As more jurisdictions come online such as the Depository Trust Clearing Corp. (DTCC), CME and international regulators, the trade reporting process will increase in complexity. When there are multiple Swap Data Repositories (SDRs) there will need to be logic to be sure the correct SWAP was sent to the appropriate SDR. And, then there is the issue of time zones and calendaring necessary to handle multiple reporting windows. You will need both time and event-based service level agreements (SLAs) along with understanding of country-specific holiday calendars in order to be sure reporting occurs within the required window
Anyone who believes they have completed their monitoring implementation for Dodd-Frank Trade Reporting must be mistaken as the rules are lacking in clarity and in flux. But, what is clear is the need for improved visibility and the capability to correlate in real-time each activity in the lifecycle of a reportable trade. Taking this approach will help ensure compliance and enable you to take the appropriate action to maintain it.
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