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Swaps Participants Gear Up for July Reporting Deadline

Even though the CFTC's rules pertaining to recordkeeping and swaps data reporting put the burden on dealers, asset mangers will still want systems for record keeping, monitoring, reconciliation and analytics.

July could be the month that transparency finally comes to the opaque $700 trillion swaps market, for that’s the deadline when certain recordkeeping and swaps data reporting rules under Dodd Frank go into effect.

According to Vinod Jain, managing consultant at Headstrong in New York, the rules pertaining to swap data recordkeeping and reporting —issued by the Commodity Futures Trading Commission on Dec. 25 2011 — will have a profound impact on the way market participants record and report their swap transactions.

A major reason why the CFTC passed the rules (under Part 43 and 45) of the Dodd Frank Act, is to increase transparency, standardization and monitoring of system risk in swaps, noted Jain.

Bringing more sunlight into the swaps market will produce aggregated views of information about prices, volume and market share to dealers, asset managers, regulators and the public.

The compliance timeline established by the Dodd Frank Act is July 16, for credit and rates and Oct. 16, 2012 for equity, FX and commodities asset classes.

However, these recordkeeping and reporting rules hinge on regulators finalizing the definitions for Swaps, Swap dealer and Major Swap Participant, as these terms will influence who is going to need to report their data. Despite some of the delays in hammering out these critical definitions, industry participants are gearing up for reporting swaps transactions which could take place as of July 16 or 60 days after the definitions of swap participant are issued, whichever is later.

“The industry is going with July 16 as a go live date, and they need to pull it back for testing,” said Jain, who specializes in OTC derivatives middle and back office processing as well as payment systems.

But before that happens, swap dealers may need a system to manage the reporting process. According to Jain, swaps participants should be aggressively building out solutions to meet the newly created recordkeeping and data reporting mandates.

To help participants comply with the looming deadline, Headstrong has developed a Trade Status Monitoring and Reporting Solution for industry participants to comply with swaps data reporting. Going beyond recordkeeping and reporting, Headstrong's system has three other modules: monitoring, reconciliation and performance analytics as part of its portfolio of services.

“Nobody had such a system before,” said Jain. While dealers generated reports for internal purposes, or for the Federal Reserve Bank of New York mandate, this reporing, which is close to real-time reporting, puts a lot of pressure on the firms to report,” said Jain, noting it could be real-time, 15 minutes, 30 minutes and other timelines based on how the trade is executed and processed.

A trade that is confirmed electronically over an electronic platform should be reported within 30 minutes, whereas a trade that is confirmed via paper (fax) after manual confirmation, would have to be reported within 24 hours, said Jain, illustrating differences in reporting regs.

These rules define a reporting party for a swap based on where the trade is executed and processed, he explained. A reporting counterparty would be obligated to report to a Swap Data Repository or SDR, which in turn, would distribute the records to regulators and the public.

If the trade is cleared, then the central clearinghouse would report the swaps trade to the SDR, but the dealer would also have to report the value of the swap to the SDR as well, explained Jain.

Although the reporting counterparty rules appear to place most of the burden on a swaps dealer, a non-reporting counterparty, such as a buy side firm, would still need to reconcile with records at the SDR, monitor their trades for compliance and use the reports provided by the SDR to optimize business decisions, said Jain.

“Whether you are reporting or not, you would still have to do the recordkeeping, the monitoring, the reconciliation and the analytics piece,” said Jain “You will need to prepare all of this internally and gather all this information and keep it updated so that when you want to do the reconciliations, you are doing apple-to-apple comparisons,” he said.

Hypothetically, Jain said, if JP Morgan and PIMCO did a swaps trade, and JPM reported the trade to the SDR, PIMCO would still want to reconcile the trade with the SDR to make sure that the correct information is sent to the regulator and that the investment manager’s internal records are correct and that what JPM reported to the SDR are correct.

Analytics will become more important because dealers will have aggregated views of the data reported to the SDR, which is similar to the way they have TRACE reporting of real-time prices and trade volume for corporate and U.S. government agency debt. The SDR would aggregate the information and tell the market the total number of trades. Dealers could use this aggregated data to analyze their market share and product volume in each asset class —interest rate swaps, credit default swaps, equity and commodity swaps. A market participant could use the publicly disseminated real-time information to price the next swap, said Jain.

“There’s whole bunch of information that would be published,” says Jain. For example, said Jain, “You could aggregate all the prices of trades you did against a counterparty." If a firm were going into default, regulators could see all the counterparties to their trades,something that was not easily visible during the financial crisis of 2008.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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3/10/2012 | 7:14:47 AM
re: Swaps Participants Gear Up for July Reporting Deadline
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