white paper dodd frank compliance
Post on 14-Jul-2015
71 Views
Preview:
TRANSCRIPT
5/12/2018 White Paper Dodd Frank Compliance - slidepdf.com
http://slidepdf.com/reader/full/white-paper-dodd-frank-compliance 1/12
Author:
Birlasoft Capital Market Practice
White Paper
Dodd Frank Wall Street Reform and
Consumer Protection Act
(Dodd Frank Title VII Act)
5/12/2018 White Paper Dodd Frank Compliance - slidepdf.com
http://slidepdf.com/reader/full/white-paper-dodd-frank-compliance 2/12
2 Dodd Frank Wall Street Reform and Consumer Protection Act
Copyright © Birlasoft 2011
Table of Contents
INTRODUCTION TO DODD-FRANK ACT ......................................................................... 3
PRESENT SCENARIO .......................................................................................... 3
BUSINESS IMPERATIVE ........................................................................................ 3
SWAP DATA REPOSITORY ..................................................................................... 4
DERIVATIVE REFORM ......................................................................................... 4
MARKET PARTICIPANTS ....................................................................................... 5
UNIQUE IDENTIFIERS ......................................................................................... 6
TRADE FLOW PROCESS IN SDR ............................................................................... 7
FINANCIAL REPORTING REQUIREMENT......................................................................... 8
ASSET CLASSES .............................................................................................. 9
RECORD KEEPING ........................................................................................... 10
CAPITAL AND MARGIN REQUIREMENTS........................................................................ 10
BUSINESS CONDUCT/SPECIAL ENTITIES....................................................................... 11
CONCLUSION................................................................................................ 11
BIRLASOFT CONSULTING SERVICES ........................................................................... 11
5/12/2018 White Paper Dodd Frank Compliance - slidepdf.com
http://slidepdf.com/reader/full/white-paper-dodd-frank-compliance 3/12
3 Dodd Frank Wall Street Reform and Consumer Protection Act
Copyright © Birlasoft 2011
After all these years of an exponential growth of the over-the-counter (OTC) derivatives marketwhich is estimated more than $600 trillion in liquidity, has been largely unregulated, leaving multipledimensions of this growing market unchecked. This was seen as a major reason during the financialcrisis in 2008 and since then regulation of derivatives became a primary focus of financial regulatoryreform. Therefore regulatory and supervisory oversight requirement has become very important tobe addressed for the OTC derivatives market.
Introduction
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which was signedinto law by President Obama on July 21, 2010, imposes a comprehensive and far-reaching regulatoryregime on derivatives and market participants. “Dodd-Frank Act”, Title VII, to be known as the Wal
Street Transparency and Accountability Act of 2010, will impose a comprehensive control and amonitoring system on the Derivatives and Market Participants. It establishes a newly-createdregistered entity, the swap data repository, or “SDR,” to collect and maintain data and informationrelated to swap transactions as prescribed by the Commission. This would consequently make suchdata and information directly and electronically available to regulators
Present Scenario
Many sections of Dodd Frank Act, Title VII, still require comprehensive observation and study that inturn will call for significant rulemaking by the Commodity Futures Trading Commission (“CFTC”), theSecurities and Exchange Commission (“SEC”), and other Federal Banking Regulators. There are manymoving parts to this derivative reform and even though comments are still being received, studiesare underway and the rules not yet official, the picture is becoming clearer each day. As a result, afull assessment of the impact of Title VII will only be possible once that rulemaking advances.
The Business Imperative
This regulatory reform calls for a wide array of reporting and record keeping requirements, includingreal time reporting of swap data and pricing information to a Swap Data Repository . Real timereporting seeks to ensure price and volume transparency, preserving the counterparty anonymitywithin the detailed confidential information. The 2008 financial crisis has been blamed on
irresponsible risk-taking by financial institutions investing in credit default swaps traded in thelargely opaque and unregulated OTC market. This is required by the regulators to conduct marketoversight, position limits surveillance and monitor related risks around these positions and exposuresThe Act provides the Securities and Exchange Commission (SEC) and the CFTC with new authority toregulate OTC commodity derivatives
5/12/2018 White Paper Dodd Frank Compliance - slidepdf.com
http://slidepdf.com/reader/full/white-paper-dodd-frank-compliance 4/12
4 Dodd Frank Wall Street Reform and Consumer Protection Act
Copyright © Birlasoft 2011
Swap Data Repository (SDR)
Dodd Frank Act, Title VII mandates the following duties of an SDR with the rules prescribed by SEC
and CFTC within their guidelines under 901 (c), 901 (d) and Part 43, Part 45 respectively. Activitiesexpected by SDR are:Acceptance and confirmation of data from multiple market participants;Recordkeeping of the trade data requirements submitted;Provide direct electronic access of data and compliance reports to the Commissions;Real-time reporting of the trade data followed by Continuation data and trade life cycleevents data obligations;Monitoring, screening and analyzing data through multiple aspects including block tradecalculation of trade data;Maintenance of data privacy with permitting data access to other regulators;Public dissemination of price data increasing more transparency for the participants
Derivative Reform
RegulatoryOversight
Regulatory cover
for OTC Markets
Mitigate Risk
to promote
Market
Integrity
EnhancedFinanicalStability
Regulated & transparenttrading of swaps will make thelandscape more competitive
and bring better pricing to themarketplace
5/12/2018 White Paper Dodd Frank Compliance - slidepdf.com
http://slidepdf.com/reader/full/white-paper-dodd-frank-compliance 5/12
5 Dodd Frank Wall Street Reform and Consumer Protection Act
Copyright © Birlasoft 2011
Market Participants
As per the regulation every derivative market participant will be impacted by the legislation, though
it varies on how an individual firm is classified. Every Swap or Security Based Swaps (SBS) participantneeds to consider as how they will manage the reporting requirements. This will vary acrossparticipant type like dealing, clearing or execution service depending on the security type of theswap. This will call for heavy discipline among these participants as they often are the mostdefaulters of the swap data reporting. There are different sets of rules apply to respective marketparticipants. Highlights on the participant requirement are as follows:
1. A “Swap Dealer” is the one who is a dealer who holds it out as a dealer or market maker inswaps or who regularly engages in swaps with counterparties in the ordinary course ofbusiness. This does not include an insured depository institution to the extent that it offers toenter into a swap with a customer in connection with originatinga loan with that customer.
2. “Major Swap Participant” is intended to cover significant non-dealer market participants, and the Dodd-Frank Act groups suchparticipants in three general categories with the followingdefining rules:
a. If a substantial position is maintained by any non-dealerin swaps for any major swap category, except positionsheld for “hedging or mitigating commercial risk” andpositions maintained by any employee benefit plan forthe primary purpose of hedging risk directly associatedwith the operation of the plan.
b. If outstanding swaps create “substantial counterpartyexposure that could have serious adverse effects on thefinancial stability of the United States banking system orfinancial markets” by any Non Dealer, he will similarlybe regulated as a major swap participant. This does notprovide any exclusion for hedging activity.
c. A financial entity that is “highly leveraged relative to theamount of capital it holds” and maintains a “substantialposition” in swaps will also be regulated as a major swap participant, unless the
financial entity is “subject to capital requirements” established by a federal bankingregulator. Consideration of substantial positions will be directed by regulated agencieslike SEC or CFTC. This also does not provide any exclusion for hedging activity.
d. The CFTC and SEC are required to publicize final rules of implementation of provisionsof Title VII within 360 days of enactment.
3. Derivatives clearing organization (“DCO”) - As per the mandatory requirements of thelegislation all swaps subject to the clearing requirement must be executed on a designated
Swap Dealers and
Major Swap
Participants advising
a “special entity” in
connection with a
swap will have a
duty to act in the
“best interests” of
the “special entity.”
A special entity isdefined as a federal,
state, or municipal
agency, an
employment benefit
plan or an
endowment.
5/12/2018 White Paper Dodd Frank Compliance - slidepdf.com
http://slidepdf.com/reader/full/white-paper-dodd-frank-compliance 6/12
6 Dodd Frank Wall Street Reform and Consumer Protection Act
Copyright © Birlasoft 2011
contract market, a swap execution facility or an exchange. The law explicitly requires thatswap dealers and MSPs use a clearinghouse for standardized or “clearable” derivativestransactions. A swap that is accepted by a derivatives clearing organization (“DCO”) oclearing agency for clearing and that the CFTC or SEC has designated as clearable must becleared.
4. A Swap Execution Facility (SEF) is defined as “a trading system or platform in which multipleparticipants have the ability to execute or trade swaps by accepting bids and offers made bymultiple participants.” It is unclear at this time exactly what constitutes, and what types oftrading platforms may qualify as a swap execution facility. All swaps subject to the clearingrequirement must be executed on a regulated exchange or a swap execution facility.
Unique Identifiers
The regulations contemplate a new way of maintaining anonymity and uniqueness of trade data and
facilitate reporting. Though they differ in terms of approaches and terminology guidelines issued byCFTC and SEC, their purpose is to maintain identifiers in the market. Unique Swap Identifier (USI) is
to be issued at the execution of trade and therefore could be used in reporting of swap data.
Similarly the parties will be assigned a Unique Counterparty Identifier
(UCI) to facilitate tracking. The regulators also suggested regarding the
Unique Product Identifier (UPI) regarding the products falling under
multiple asset classes.
Across this mechanism of selecting unique Identifiers, USI is most
important to track the uniqueness of swap trade and its enrichment
information, this is a tool that enables data aggregation across
counterparties, asset classes, transactions so that regulators can monitorand act to keep situations in order. While participants need to be
registered with relevant SDRs in order to send trade submissions by
verifying their respective UCIs. Ideally Swap Execution Facility (SEF) or
Designated Contract Market (DCM) will be responsible for assigning the
USI to the swaps they execute. A Swap Dealer (SD) or Major Swap
participant (MSP) will be next if the swap is executed bilaterally
followed by any other swap counterparties with the reporting obligations
for a swap when no SD or MSP is counterparty.
Though these identifiers are the best suggested tools to bringtransparency and enable reporting, there are serious concerns have been
expressed by major institutions regarding implementations of the same. All parties agreed that under
the proposed regulations no one set of existing identifiers enables all purposes. With several option
being discussed in the market including barcode technology, XBRL, ISO Solutions, SWIFT, BIC
registration and governance, operational considerations of managing this data is dominated by third
party providers like Avox /DTCC, Reuters, SWIFT and others.
“Through improved
transparency, we
will no longer have
issues like we did
after the Lehman
bankruptcy, when
market participantsand others were
concerned about
firms' exposures to
that situation. And
firms like AIG will no
longer be able to
amass so much
exposure virtually
unnoticed” said
Julian Day, Head
Trading
5/12/2018 White Paper Dodd Frank Compliance - slidepdf.com
http://slidepdf.com/reader/full/white-paper-dodd-frank-compliance 7/12
7 Dodd Frank Wall Street Reform and Consumer Protection Act
Copyright © Birlasoft 2011
Trade Flow Process in SDR
The figure below will give an overall idea about how the trade data flow process takes place in any
swap transactions
5/12/2018 White Paper Dodd Frank Compliance - slidepdf.com
http://slidepdf.com/reader/full/white-paper-dodd-frank-compliance 8/12
8 Dodd Frank Wall Street Reform and Consumer Protection Act
Copyright © Birlasoft 2011
Financial Reporting Requirements
Objectives for reporting under Dodd Frank Title VII require swap data reporting for real time
dissemination and confidential regulatory use. Reporting requirements specify price and volumetransparency in the data submitted keeping the counterparty anonymity maintained. This is to be
submitted by market participants across Real Time Data, Continuation Data, Confirmation
Lifecycle events and Valuation data to relevant SDRs „as soon as technologically possible‟
Submitting party could be anyone on behalf of the real reporting party for the transactions, wherein
SDR will be maintaining the relationships between these parties and accepting the submitted trade
messages. This data will be displayed for the further reporting by SDR to SEC or CFTC, wherein
acknowledgement is being generated and sent to the parties involved in a trade.
In terms of real time data reporting CFTC has proposed at least 28 data fields while the SEC
proposed at least 11 fields to be captured and transmit to an SDR for public dissemination in real
time. The two sets of fields are given below
CFTC – Real time reporting fields for Swap SEC- Real time reporting fields for security based swaps
Asset Class Asset classSub-asset class Price
Contract Type Identifier for SBS and specific assets/issues ofunderlying
Contract sub-type Notional amount/ currency
Price forming continuation data Date and time of executionUnderlying Asset 1 Effective date
Underlying Asset 2 Scheduled termination date
Price notation Terms and frequency of any fixed or floating ratepayments
Additional price notation Cleared or unclearedUnique product identifier Whether parties are SB swap dealersCancellation Indication that swap does not reflect the market, as
necessaryCorrection
Date stamp
Execution time stamp
Cleared or unclearedIndication of price affecting terms
Block or large notional
Execution venue
Instrument
Start date
Notional currency 1Notional currency 2
Notional or principal amount
Payment frequency 1
Payment frequency 2
Reset frequency 1Reset frequency 2
Tenor
5/12/2018 White Paper Dodd Frank Compliance - slidepdf.com
http://slidepdf.com/reader/full/white-paper-dodd-frank-compliance 9/12
9 Dodd Frank Wall Street Reform and Consumer Protection Act
Copyright © Birlasoft 2011
SEC has come up with three types of swap information to be reported to SDR:
a) Real time information (generally defined as less than 15 minutes) and disseminated to public
immediately.
b) Additional information for regulatory purposes, to be reported within specified times to an
SDR but not to be publicly disseminated such as unique participant identifiers, other terms of
the transaction, name of the clearing organization if the SBS is cleared, and the venue where
SBS was executed.
c) Life cycle events information reporting which comprises of changes resulting from an
assignment or notation, partial or full termination of the SBS , changes in the cash flows
originally reported, changes in collateral agreements and corporate actions affecting a
security on which SBS is based upon.
With respect to confidential data CFTC proposed the regulators that there should be two categories
of the reportable data:
a) Creation data- information arising from the creation of swap which actually consists of a swap‟s
primary economic terms and confirmation data for the swap. By primary economic terms means al
terms verified and matched by the counterparties at or shortly after the execution of the swap i.e.
the information that arises from affirmation, matching or confirmation and differs by asset class and
execution choices. By confirmation data means data consists of full, signed legal confirmation by the
counterparties of all of the terms of a swap matched and agreed upon in confirming the swap
b) Continuation data – information about the swap until termination or expiration.
While the data fields for confidential reporting duplicate many fields required for real time
reporting, they extend well beyond to include contract terms, execution and clearing choices.
Asset Classes
Technologically most of the SDRs will be supporting MQ submissions using markup languages like FpML
or FIXML etc, wherein the securities‟ fields across the asset classes (mainly Credit, Equity
Commodity, Rates and FX) will be mapped with the used markup language to accept and receive data
in SDR‟s data warehouse. Challenges could be identifying data fields to report and flagging that data
into real time and regulatory stream and then delivering a logic for them to be reported in requiredpurpose i.e. whether Real time or Regulatory. Moreover, these fields will vary for individual asset
class and many of them will be new and undefined in a standard template for structured derivative
products. Therefore even though the SEC‟s 901 rules and CFTC‟s Part 43,45 rules will be used to
submit trade messages and data, these proposed rules would require swap transaction information to
be transmitted using data standards to secure , centralized SDRs that disseminate information to
regulators and participants.
5/12/2018 White Paper Dodd Frank Compliance - slidepdf.com
http://slidepdf.com/reader/full/white-paper-dodd-frank-compliance 10/12
10 Dodd Frank Wall Street Reform and Consumer Protection Act
Copyright © Birlasoft 2011
In this complex landscape of reporting requirements, it would ideally be partially automatic and rest
as user driven at the Regulator‟s end. There will be provision for Ad-hoc reports where in a few
standard reports would need to be automatically generated and kept as a part of standard process
for the regulators where in for the complex and detailed reporting requirements could be addressedby canned reports as per the user selection over parameters of the reports. This is again an issue as
per the regulatory regime proposed two different ways by SEC and CFTC. The SEC requirements are
mainly from two sources which are real time and confidential reporting that involves clearing houses
counterparties, exchanges/ platforms and other participants involved to report data for specific
fields of a trade. On the other hand SEC mandates counterparty to
report specific data and permits third parties to fulfill their
responsibility to submit rest of the information required, wherein
considering the Real Time information as the base information.
Above requirements and differences in terms of regulatory
demands as prescription of reporting required by SEC and CFTC willcreate challenges for counterparties, respective systems and SDRs
to accept swap and SBS data across securities.
Record Keeping
Swap dealers and MSPs must keep books and records as required by
their prudential regulators or the CFTC as prescribed by CFTC rule
or regulation and must maintain daily trading records including such
information as prescribed by CFTC rule or regulation. SBSDs and
MSBSPs have corresponding record keeping requirements that are
administered by the SEC in accordance with SEC rule or regulation
Capital and Margin Requirements
The CFTC, the SEC and/or (in the case of banks) the applicable
prudential regulator will prescribe minimum capital requirements for swap dealers, security based
swap dealers (SBSDs), Major Swap Participants (MSPs) and Major security based swap
participants(MSBSPs). Capital requirements will be determined in accordance with perceived risk,
such that presumably registered entities that enter into un-cleared swaps will face higher capitarequirements than registered entities in the same category that enter into similar cleared swaps.
The CFTC, the SEC and/or (in the case of banks) the applicable prudential regulator will prescribe
minimum initial and variation margin requirements on un-cleared swaps entered into by swap
dealers, SBSDs, MSPs and MSBSPs, regardless of whether the other party is also one of the foregoing
registered entities. These margin requirements expressly apply only to such registered entities, and
not to other parties.
CFTC Chairman Gary Gensler
put it this way:
“The Wall Street reform bill
will –for the first time –bring
comprehensive regulation to
the swaps marketplace. Swap
dealers will be subject to
robust oversight. Standardized
derivatives will be required to
trade on open platforms and
be submitted for clearing to
central counterparties. The
Commission looks forward to
implementing the Dodd-Frank
bill to lower risk, promote
transparency and protect the
American public.”
(Comments on Enactment of
Wall Street Reform and
Consumer Protection Act,
CFTC)
5/12/2018 White Paper Dodd Frank Compliance - slidepdf.com
http://slidepdf.com/reader/full/white-paper-dodd-frank-compliance 11/12
11 Dodd Frank Wall Street Reform and Consumer Protection Act
Copyright © Birlasoft 2011
Business Conduct/Special Entities
Swap dealers and MSPs must comply with business conduct standards set by CFTC rule or regulation
SBSDs and MSBSPs also must comply with business conduct standards set by SEC rule or regulationBusiness conduct standards may relate to fraud, manipulation, abusive offering and sales practices,
supervision, position limits and dealings with “special entities.” Special entities include ERISA plans,
governmental plans, endowments, state and local governments and federal agencies. The specia
requirements for dealers and major participants that are counterparties to non-governmental specia
entities will be set forth in rules and/or regulations subsequently promulgated by the relevant
regulator. In addition, the Act provides that a dealer who acts as an advisor to a special entity must
act in the best interests of the special entity and use reasonable efforts to obtain sufficient
information in order to make that determination. Further, dealers and major participants that are
parties to swaps with governmental special entities must comply with applicable rules that require
the dealer or major participant to satisfy certain due diligence and disclosure requirements
Conclusion
Though several market participants have expressed their intent to register as SDRs for various asset
classes, this will lead to participants submitting their trade information to more than one SDR even
for an individual asset class. This will leave with multiple SDRs for single asset class in the markets
arising regulatory challenges like an added burden of aggregating and reconciling this data
consolidation of the reporting further from these SDRs to the regulators. To manage financia
reporting requirements going forward, companies will need to apply a higher level of focus and rigor
to the quality and maintenance of data across the full suite of enterprise risk management activities
from front to back office, across business units and upward to the corporate finance and compliancefunctions. Complex and unclear rules for establishments of participants like SEF, trade message
submissions, role and responsibility of DCO and DCM which will change the OTC derivatives regulatory
behavior and establish new benchmarks forever.
Birlasoft Consulting Services
To meet growing industry challenges, banks and other financial institutions are, increasingly, turning
to technology solutions to automate their business operations. However, IT operations bring in
additional complexity, as well as heightened security risks, both internal and external. Birlasoft
leveraging its considerable experience and domain expertise in the Banking and Financial sector,provides Consulting Services to help organizations optimize their IT operations to successfully meet
industry requirements of governance, risks, security and compliance
5/12/2018 White Paper Dodd Frank Compliance - slidepdf.com
http://slidepdf.com/reader/full/white-paper-dodd-frank-compliance 12/12
12 Dodd Frank Wall Street Reform and Consumer Protection Act
Copyright © Birlasoft 2011
About Birlasoft
Birlasoft is a leading provider of information technology services in both onshore and
offshore models to Fortune 1000 as well as mid-sized organizations in banking, financial
services and insurance, retail, healthcare, manufacturing and independent software vendor
sectors. Birlasoft‟s services include application development, support & maintenance,
enterprise application implementation, integration, infrastructure management and quality
assurance & testing. Birlasoft‟s robust delivery processes embrace digitized project
management methodologies, embedded within proven practices of Six Sigma and SEI CMMi
Level 5 on Continuous Representation. The Noida centers of the company have been
assessed at PCMM Level 3 for its HR practices. Headquartered in Noida (National Capital
Region), India, Birlasoft has about 4000 employees across US, UK, Germany, Netherlands,
Czech Republic, Malaysia, Australia, Singapore and India.
Birlasoft is part of the global $1.4-billion CK Birla Group which traces its roots back to over
150 years and has diversified interests ranging from automobiles, cement, paper, software
etc. to hospitals, schools and colleges as part of its philanthropic work.
www.birlasoft.com
Global Presence
US Asia Pacific Europe IndiaT +1 732 287 5000 T +61 2 9959 2396 T +44 1438 350270 T +91 120 662 9000F +1 732 287 5559 F +61 2 9959 2244 F +44 1438 749309 F +91 120 662 9494
top related