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Dodd-Frank rules eight years later: CFTC/NFA audits

07 July 2020 Sherry Kurisinkal

Are you ready for the SEC's new rules for Security Based Swap Dealers? CFTC registered Swap Dealers are still struggling to successfully comply with Dodd-Frank.

Within the last year, the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) have been increasingly reviewing firms' compliance with the myriad of CFTC regulations arising out of Title VII of the Dodd-Frank Act. Specifically, they have been looking at the quality of the entity reference data, reviewing whether the firm and its clients are adhering to the Dodd-Frank rules, and whether collected data meets the required standards to support the appropriate classifications and ongoing reporting obligations.

During these audits, a number of common compliance challenges have been identified. Firstly, while much of the market has turned to ISDA Amend as the industry-standard digital solution to administer the protocols and representation letters, some entities and companies still rely on sharing this information via paper documentation, resulting in incomplete information and poor audit trails. Secondly, some swap dealers collecting the information do not have robust policies to validate the reasonableness of the responses, and in some cases have taken the minimalistic 'check-the-box' approach. What swap dealers are discovering is not getting data collection right at the point of client onboarding is causing them to fail to meet CFTC requirements downstream.

The impact of having inadequate policies and controls and thereby not capturing correct information upfront has significant implications downstream including:

  • Failure to execute the trade on the appropriate venue
  • Failure to clear the relevant trades
  • Failure to include the trade in margin threshold calculations
  • Failure to report the trade Primary Economic Terms reporting (PET) reporting and end of day reporting

In addition, dealers run the risk of non-compliance with portfolio reconciliation requirements and not providing the representations required under the Dodd-Frank External Business Conduct Standards (pre-trademarks, product risks and characteristics, etc.).

Focus Areas

Given the above issues, swap dealers have been scrambling to remediate their existing information, and outreach to their clients for missing/ incorrect information. As stewards of the ISDA Amend data, IHS Markit has collaborated with a swap dealers on these remediation projects and observed the following four areas as recurring themes for best practices to ensure swap dealers have the capabilities and processes in place to ensure quality data and a passing grade by the regulators and internal auditors.

1. Taking a full inventory of available data

The first step is to look at every open account at a swap dealer and categorize based on the levels of trading activity. In this process, swap dealers are finding a large amount of open accounts that have had little to no client activity over the last 6 months to a year. Remediating these accounts for regulatory purposes is at a huge cost, with very little benefit. This is kicking off a huge offboarding initiative as a side project of the Dodd-Frank remediation exercise. Oddly enough, a focus on client offboarding can reduce the size and cost of remediation efforts.

Of the active accounts, swap dealers are taking inventory of the available data points against a repository of 100+ data attributes. This inventory gives a full map of what information is available and what is outstanding.

Data is powerful. A clear view of the current state of available data will create a clear path to remediation.

2. Reviewing internal compliance policies and relevant operational procedures

Swap dealer legal and compliance teams implement the various regulatory requirements through a set of policies. However, it is often the case that these policies do not translate to clear operational procedures leaving much to interpretation and undocumented exceptions. Additionally, gaps in the data collection and organization has resulted in poor application of these policies and procedures. Remediation exercises are only effective after a full review of the existing policies have been conducted, and a clear translation to operational procedures has been documented. There exists a matrix of possibilities that involves products traded, entity types, and verification of a US jurisdictional nexus.

3. Creating a clear remediation plan while leveraging technology to conduct outreach and provide clear audit trails for regulators.

It is important to not repeat mistakes of the past regarding data collection, only to fail a future regulatory audit. Data gathering remediation plans should always have audit information as a core piece of the puzzle. Leveraging technology that automatically records the activity generated during the remediation process is the key to success. Every swap dealer should easily be able to ascertain where, when and who they received information from for each client entity.

The right technology choice can also determine the success of a remediation exercise. Clients are generally hesitant at providing responses, and any inefficiencies in the process will reduce the response rate. Technologies that create a seamless and intuitive client experience increase the probability of a response.

4. Establishing a plan for the future: Onboarding's pivotal moment

It is fairly obvious that a remediation exercise happens mostly because of flaws in the onboarding process resulting in inadequate or otherwise inaccurate entity reference data. Any remediation exercise should include a transition plan to the new normal, where the business-as-usual exercises are conducted with the most robust processes. This means that not only does the existing onboarding playbook need to be re-written, but also the right technology needs to be deployed to ensure that the data-gathering and onboarding processes can be carried out effectively and consistently for years to come. This is especially important with Security Based Swap Dealers (SBS) as the SEC looks to impose the Dodd-Frank rules for Swap Dealers against SBS, and a similar but new set of requirements is required to ensure compliance with these new SEC rules.

As the derivatives markets head into a new decade, onboarding is experiencing a pivotal moment. There is a renewed focus on enhancing the customer experience, with onboarding being positioned as a key touchpoint where firms can differentiate and demonstrate service excellence.

  • Put in place proper onboarding policies to monitor that the data you are receiving is consistent and in compliance.
  • Use the industry standard tools, like ISDA Amend, to ensure compliance and single data feed for accurate information.
  • Improve customer experience - leveraging advanced tools like Outreach360 help clients understand the regulation and support a Swap Dealer's compliance through accurate adherence.

Finally, we've been helping firms comply with regulations - benefit from the accelerators of firms like IHS Markit who have been supporting the market's compliance with global regulations including Dodd-Frank, SFTR, MiFID and EMIR.

For more information, get in touch at

IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

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