Your End-User Dodd-Frank Checklist
In Texas it’s illegal to graffiti someone’s cow. Seriously, you can’t make this stuff up. So at some point someone in Texas took branding a bit too far. And a legislature got into a knot and viola we have a law.
Speaking of fun laws, Dodd-Frank is upon us. Here is a rundown to go live:
End User Requirements BY APRIL 10th:
Get Your CICI! (The precursor to a Legal Entity Identifier (LEI)).
You’ve got to register. Every party to a OTC financial transaction MUST register by April 10th. It’s easy. Get it done! The CFTC may not be able to make heads or tails of trade submission (see below). But they will be able to tell if a company has properly registered. See the registration link here: www.ciciutility.org
Load All Historic Financial Deals into an SDR
If you are a party to any financial transaction in energy or commodity open as of July 21, 2010 to April 10th, you need to load EVERY historical deal into a Swaps Data Repository.
Yes, your counterparty may do this for you. (Such as if you were dealing with a bank) But you need to make sure they either did it or intend to do it by April 10th. The proof positive is by getting the USI (Universal Swap Identifier) from your counter-party.
Embedded Options are Reportable. So say you did a physical fixed price deal. But let’s further say the deal had some swing optionality. The physical fixed part of the deal is not reportable…but the swing? Yep, that’s reportable. It can get dicey here because sometimes your counterparty may disagree as to whether an embedded deal is reportable. It’s worth spending some time examining contracts and determining whether there is any embedded optionality and reaching out to your counterparty.
Don’t Assume That the Exchange Will Send Historical Trades to the SDR for You.
Although exchanges are required to report deals as of April 10th, DO NOT assume that they will send over your historical financial deals. This is particularly true if they were “facilitated” OTC deals. It is a mistake to assume that your cleared and un-cleared “exchange facilitated deals” will be sent to an SDR.
EOD Reporting
On April 10th you’ve got to make sure that every new fin deal is reported to an SDR by end of day. Are all your counterparties doing the reporting? Yes? Great! Don’t forget your Part 45 obligations around recordkeeping. Yes, even if you do not do the reporting there is a lot of mandatory requirements around how you keep these deals in house.
Let’s say you are a oil and gas producer. To hedge production you entered into a 3 way collar. Is this reportable? You bet. Odds are that a swaps dealer is your counterparty. Just know that these are subject to “in house” inspections and they need to be complete.
Be Prepared for it all to Change
So Interest Rate and FX has been reporting since January. How has it gone? Terrible! While most banks and market participants sent these trades have been sent over to the DTCC SDR and a handful over to ICE Trade Vault, the start of the Dodd-Frank market turned out to be a near total missed approach. The data sent over to the SDR’s was so incomprehensible, that the CFTC admitted they couldn’t find the London whale even if they wanted to. See this article.
Gensler’s comments in this doc highlight the CFTC lack of resources being part of the problem.
The net result of this is all that work you have done so far is going to change. The CFTC will certainly be rolling out new requirements on how products are reported. Be prepared.
ICE E-Confirm
I don’t mean to shamelessly plug ICE. But if you are not using eConfirm you are in for a world of pain. I don’t mean to suggest that you have to use Trade Vault as your SDR. Let’s say you are the reporting counterparty and use DTCC as a SDR. Your counterparty needs to know that you reported the deal. Easily solved by sharing the USI. The EASIEST way to get USI on both sides of the trade is eConfirm. Rumor is that ICE has on-boarded hundreds of new users into eConfirm and it looks like the better part of the market is going to go there for confirmations.
