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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.
Conclusion:
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.
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.
Posted 07 July 2020 by Sherry Kurisinkal, Director, Platforms & Regulatory Compliance, IHS Markit
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.
