dodd-frank and the impact on internal audit the path forward for energy companies · ·...

Paul Campbell Deloitte & Touche LLP November 5, 2012

Dodd-Frank And The Impact On Internal Audit The Path Forward For Energy Companies The Institute Of Internal Auditors – Houston Chapter

Copyright © 2012 Deloitte Development LLC. All rights reserved.

Table of contents

1. Overview of Dodd-Frank Act Title VII

2. Classification and potential impact on an organization

3. Major requirements, timeline updates and recent changes

4. Where the energy industry is struggling

5. What companies and internal audit should consider doing now

6. Specific internal audit considerations

7. Questions & Answers

Deloitte Center for Energy Solutions


Paul Campbell

Principal, Deloitte & Touche LLP

Email: [email protected] Office: 713.982.4156 Mobile: 713.503.6993

Paul is a leader in Deloitte’s Energy Risk practice, providing services to the energy industry and the federal government. With

more than 20 years of experience, he also leads specialists from a group of approximately 200 professionals solely dedicated

to providing services related to risk strategy, regulatory compliance, credit, climate change, quantitative analytics, technology,

business process and operations and risk accounting to energy companies.

Paul has worked with some of the largest companies in North America on transformation efforts related to the underlying

infrastructure, systems, processes and technologies for new organizations as well mature organizations focused on

significantly changing operations with thorough programs of change or responding to regulatory directives. This includes

helping to design, develop, select and implement energy trading and risk management systems, as well as those to support

compliance with derivative accounting guidance. This includes leading all energy related efforts for regulatory compliance and

Dodd-Frank.

He has led numerous risk assessments of front, middle and back office operations and worked extensively on risk

management issues related to new business strategies; including the resulting process, technology and accounting change

implementations. These assessments have often then led to the development of a program of activities related improvements

in the risk and trading processes.

His client service work also includes developing of end user energy management strategies, due diligence analyses,

bankruptcy work, and significant litigation support efforts regarding portfolio valuation, internal investigations and support to

external counsel in trading and risk management matters. Paul also has significant experience speaking and providing training

to both internal and external audiences. Prior to joining Deloitte, Paul worked for 4 years as a regulatory economist for the

Maryland Public Service Commission and then worked for several energy trading companies moving to Houston.

• BS, Physics – The George Washington University

• BA, Political Communications – The George Washington University

3 Deloitte Center for Energy Solutions

mailto:[email protected]

Copyright © 2012 Deloitte Development LLC. All rights reserved. 4 Deloitte Center for Energy Solutions

Overview of Dodd-Frank Act Title VII


Glossary of terms and acronyms

API Application Programming Interface

BCS Business Conduct Standards

CFR Code of Federal Regulations

CFTC Commodity Futures Trading Commission

CPO Commodity Pool Operators

CRFC Core Reference Futures Contract

DRR Data, Recordkeeping and Reporting

DCM Designated Contract Market

DCO Derivative Clearing Organization

ECP Eligible Contract Participant

ETRM Energy Trading Risk Management

FAS Financial Accounting Standard

FTR Financial Transmission Rights

ISO Independent System Operator

LEI Legal Entity Identifier

LTR Large Trader Reporting

MSP Major Swap Participant

NFA National Futures Association

Nons Non SD / Non MSP

OTC Over the Counter

PLR Position Limits Reporting

RTO Regional Transmission Organization

RTR Real Time Reporting

SD Swap Dealer

SDR Swap Data Repository

SEF Swap Execution Facility

SPV Special Purpose Vehicle

UCI Unique Counterparty Identifier

UPI Universal Product Identifier

USI Unique Swap Identifier



Dodd-Frank Act1: Background and perspective


Dodd-Frank Act Title VII includes key provisions for the energy

industry with clear consideration of the Commodity

Futures Modernization Act of 2000 that exempt

many over-the-counter energy trades from federal

regulation.

Transparency

Counterparty Risk

Management

CFTC (Commodity Futures Trading Commission)

Swap Data Repositories, Swap Execution Facilities

Major Swap Participants, Swap Dealers, End Users

Reporting requirements (execution and record keeping)

Push from OTC to Derivative Clearing Organizations

Portfolio valuations and reconciliations

From un-cleared to cleared transactions

Position limits (TBD)

Capital requirements

Compliance (Chief Compliance Officer)

Controls

1. Legislative Phase

2. Regulatory Phase

3. Commercial Phase

• Act signed into law July 2010

• Many rule making responsibilities

delegated to the SEC and the CFTC

• Law passed as response to concerns over

inadequate oversight of financial and

commodity markets

• CFTC aimed for Dec 2011 for final rules

(numerous delays have occurred)

• 30+ rule making processes initiated

• Rule making activities address new market

structures and functions, changing

definitions, new processes and more

oversight

• Ongoing advocacy process

• Dealing with uncertainty over final rules and

implementation timelines

• Evaluating readiness to handle proposed

rules

• Evaluating financial impacts related to credit

and collateral as well as potential capital

investment needs

• Implementing changes to people, processes,

technology, and governance

Systemic Risk

in Financial

Markets

associated

with

derivatives

trading

1 http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm


Energy industry and Non-SD application


Title VII – Wall

Street Transparency

and Accountability

(regulates OTC

Swaps)

• For SDs, 1,000s of

applicable rules Expecting majority of

energy companies to be

classified as a Non-SD /

Non-MSP (aka NON)

Applicable to All Eligible

Contract Participants

• Reporting

• Record keeping

• Compliance with exchange

rules

• Position limits (TBD)

• Adherence to trade practices

• End-use exception tracking

and reporting

• Margining (to the extent that

trades are moved to clearing)

Title VII as applicable to

Non-SD’s / Non-MSPs

• Approximately 10 Potential

RMAs, 100s of rules

All of Dodd-Frank

Title VII - Swap Dealers /

Major Swap Participants

Non Swap Dealers /

Non Major Swap Participants

Applicable to Swap Dealers and Major

Swap Participants

• Registration

• Large trader reporting

• Business conduct rules

• Margin and collateral management

• Capital requirements and reporting

• Risk management

• Centralized clearing

• Business continuity

• Board and Senior Management have

specific responsibility and personal liability

• Designation of a Chief Compliance Officer

• Annual Compliance Report

Based on both qualitative and

quantitative assessments.

Dodd-Frank Wall

Street Reform and

Consumer

Protection Act (All

Industries)

- Categorized into

16 Titles

- 10,000s of rules

across 16 Titles


Important points for energy companies

• The CFTC is working to finalize the rule-writing across the more than 30 different rule categories and

is implementing a process balancing market disruption, cost and desired compliance status. The

rules are generally comprehensive in nature across all commodities, IR and FX.

• Final rules yet to be published include:

1. Margin and clearing requirements, including risk capital for Swap Dealers and MSP

2. Position limits – unclear on regulatory path following Sep 22

• The CFTC has finalized most rules for compliance so the time to comply may vary depending on the

category of company or asset. A staged approach is underway, in which effective dates for

compliance vary by rule and become known as final rules are published. Current compliance

timelines have ranged from 30 to 270 days.

• Most companies in the energy industry would describe themselves as having an internal group

―maintaining awareness‖ of the rules, but often struggling with governance issues and how to plan or

commit resources in the face of regulatory uncertainty

• Most companies have not addressed Sec. 1502 or 1504 as part of integrated planning.

• There are significant compliance requirements for almost any entity using swaps.

• There are specific concerns related to “special entities”.

• There is some chance for further delays or altering of regulations, but a clear desire by

regulators to finalize rules quickly.

• Further uncertainty is likely.



Beyond Title VII - Other non-swap related provisions (Title XV) 1


Conflict Minerals Provision (Sec. 1502)

• Finalized on August 22, 2012

• Companies that use conflict minerals from the Democratic Republic of the Congo and adjoining

countries (―DRC‖) that are ―necessary to the functionality or production of a product manufactured

by such person‖ must disclose annually public on their website, file a conflict mineral report to the

SEC and annual report.

• The report will include description of measures of due diligence on the minerals source and chain of

custody. Even if the minerals did not originate in the DRC the company would be required to

maintain all documentation and issue the report.

• The SEC requires this report go through an independent private sector audit.

• The SEC realizes that there is some ambiguity as to whom the conflict mineral provision applies to.

This would include many companies that do not have to report today.

• The SEC proposed rule would make amendments to Form 10-K, Form 20-F, and Form 40-F to add

this information.

• Issuers must comply with the final rule for the calendar year beginning January 1,2013 with the first

reports due May 31, 2014

Mine Safety (Sec. 1503)

• Finalized on December 21, 2011

• Already in effect



Beyond Title VII - Other non-swap related provisions (Title XV) 1


Disclosure of Payments to Governments by Resource Extraction Issuers (Sec. 1504)

• Finalized on August 22, 2012

• Companies that extract or commercial development related to oil, natural gas, or minerals will need

to file an annual report with SEC containing all the payment information to foreign governments at

the project level. This report will include:

‒the total amount of payments, by category;

‒the currency used to make the payments;

‒the financial period in which the payments were made;

‒the business segment of the resource extraction issuer that made the payments;

‒the government that received the payments and the country in which the government is located;

and

‒the project of the resource extraction issuer to which the payments relate

• The SEC proposed rule would make amendments to Form 10-K, Form 20-F, and Form 40-F to add

this information.

• According to the rules the companies will need to include this information starting with an issuer’s

annual report relating to any fiscal year beginning on or after September 30, 2013.



Whistleblower Regulations - Section 7481


The CFTC has issued final rules to provide whistleblower incentives and protection which

became effective in September 2010

• Requires CFTC to pay awards to whistleblowers if provided information leads to successful

enforcement of CFTC action.

‒ Enforcement must produce monetary sanctions >$1million.

• Certain criteria evaluated to determine issuance of reward:

‒ Significance of information.

‒ Degree of assistance in support of covered judicial or administrative action.

‒ Public policy

• Certain government employees are ineligible to be granted whistleblower rewards



Classification and potential impact on an organization


Classification determines impact on an organization


Swap Dealer

Or

Major Swap Participant

Many of the reporting requirements fall

upon the SD/MSP categories including

reporting some information on behalf of

the non-SD.

A common question: What is our

comfort level as an organization relying

upon others’ records and how do we

want to validate this data?

• Registration

• Large trader reporting

• Business conduct rules

• Margin and collateral

management

• Capital requirements and

reporting

• Risk management

• Centralized clearing

• Business continuity

• Designation of a Chief

Compliance Officer

• Annual Compliance

Report

Balance cost/benefit of registering as a Swap Dealer

• Reporting

• Record keeping

• Compliance with

exchange rules

• Position limits

• Adherence to trade

practices

All Eligible Market Participants

How would an organization

characterize its

swap activity*?

e.g., hedging, asset optimization,

speculation, potentially volume and

intent.

*Strongly consider the role of external counsel in interpretation of rules.


Major requirements, timeline updates and recent changes


Requirements applicable to all energy market participants


Basic

Requirements

Details

Reporting and

Recordkeeping

• Retention and reporting of pre-execution, execution and post execution

transaction information including orders, executions, oral and written

communications; all indexed to the transaction

• Data kept for the entire existence of a swap and five years after the swap’s

termination or expiration.

• Data must be ―readily accessible‖, and records must be retrievable by the

recordkeeping counterparty within five business days.

Clearing • All swaps must be cleared with limited exceptions

End-Use

Exception To

Clearing

• Process at time of transaction, with pre and post execution documentation

and controls

Compliance with

exchange rules

• Adherence to margin and collateral requirements for transactions executed

on the exchange platforms

Adherence to

trade practices

• Enhanced anti-manipulation authority requiring stronger self-surveillance

along with anti-fraud protection.

Position limits • Monitoring and reporting to be defined at a later date

There is a general misconception by non-financial entities that if “all we are doing is hedging

(or asset optimization)” there are little or no compliance obligations. There currently is no

broad “end-user exemption” or classification that would be applied.


Illustrative Dodd-Frank regulation timeline


Non SD:

Real-time

Reporting &

Data

Recordkeeping

(All Asset

Classes)

Real Time

Reporting &

Data

Recordkeeping

(Credit & IR

Swaps)

Final

Entity

Definition

Published

SD/MSP:

Real-time Reporting &

Data Recordkeeping

(Other Commodity

Swaps)

Business Conduct

Standards (Ext and Int)

Swap

Definition

Published

(TBD)

Position

Limits

Reporting SD/MSP:

Large Trader

Reporting

May

12

Jun

12

Jul

12

Aug

12

Sep

12

Oct

12

Nov

12

Dec

12

Jan

13

Feb

13

Mar

13

Apr

13

May

13

Jun

13

Q3-Q4

2013

Remanded

Position

Limits

Reporting

Election Day Inauguration Holidays

Swap

Definition

Finalized

Registration

(Joint with

NFA)

Estimated:

Reporting

End-User

Exceptions


Where the energy industry is struggling


Key challenges summary

1. Scope of the impact across operations

2. Major uncertainty within regulatory environment

3. SD vs. non-SD classification (considering future operations and prices)

4. To clear or not to clear?

5. Potential hedging & end-user exception violations

6. Changes to contracts with counterparties, SDR, DCO, etc.

7. System enhancements

8. Corporate changes and decision making

9. Position limit compliance (TBD)

• Technical issues outstanding include

‒ Bookouts

‒ Notional value calculations

‒ Swap definitions



Illustrative spectrum of industry reaction

How to move forward when faced with uncertainty? 1. Deal with this as you would any other project.

2. Act on the known and plan for the unknown – assess the potential impact of change to both.

3. Balance the cost of waiting and higher potential cost if significant external resources are

called in at the last minute.

4. Always have a plan!


Wait and See Maintain

Awareness Pro-Active


Illustrative spectrum of IA responsibility


Wait and See Maintain

Awareness Pro-Active

Compliance /

Project Execution

Improve Efficiency /

Add Value


What companies and internal audit should consider

doing now


What energy companies should consider doing now


1) Deploying Cross-

functional Dodd-Frank

Implementation Team

• Engage risk, IT, compliance,

accounting

• Engage external counsel

• Deploy a detailed plan, with

estimates of resources/budget

• Maintain awareness with Senior

Management and Board of

Directors

2) Assessing Likelihood of

Being an SD/MSP

• Detail all swap transactions

• Confirm ability to identify and

aggregate all needed data

• Disaggregate cleared vs. non-

cleared and hedges

• Document counterparties and

―special entities‖ dealing

• Conduct rule by rule gap

assessment

4) Evaluating Technology

Requirements and

Capabilities

• Developing short term reporting

solutions

• Identifying immediate and long

term changes to ETRM systems

• Understanding and building

connectivity with SEF/SDR

3) Validating Recordkeeping

Capabilities and Preparing

for Real-Time and General

Reporting Obligations

• Identify process changes across

front, middle, and back office

• Ensure all transition swap

documentation is being

maintained

• Identify reporting counterparty

• Develop the process for data

verification and correction

• Develop processes for capturing

recordkeeping data elements

6) Preparing for Position

Limit Obligations (TBD)

• Work with IT to document needed

changes and functional

requirements for tracking positions

• Identify and aggregate positions

across entities

• Confirm internal notification

capabilities exist

5) Evaluating Potential Credit

Implications

• Analyze liquidity impacts of

margin posting for cleared swaps

• For uncleared swaps, determine if

counterparties are subject to

CFTC or bank regulator margin

rules

• Determine if changes are needed

to counterparty mix

• Reviewing existing contract mix


Illustrative long term Dodd-Frank compliance

Illustrative

Real-time Reporting and Record

Keeping Deadline (SD/MSP)

Phase 3: Implementation Planning

Phase 5: Compliance Program Maintenance

Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013

Decisions required

• Allocation of resources for PMO and Implementation Support – internal/external

• Allocation of resources to change management – internal/external

• Impact across trading systems and/or reliance upon vendor solutions

Any approach should balance cost/resource requirements with regulatory risk tolerance and the ability to

sustain a program

Phase 2: Assessment

• Entity Classification

• Rule-by-rule Impact

Analysis

Phase 1: Project

Governance


Illustrative Rule Milestones

(e.g. final definition of Swap

Dealer)

Phase 3: Gap Assessment

• Rule-by-rule gap analysis

• Implementation Planning

Phase 4: Implementation Plan Execution

Large Trader Reporting

Deadline

Phase 4: Implementation

• Plan Execution

Phase 2: Assessment

Real-time Reporting and Record

Keeping Deadline (Non-SD/MSP)


Illustrative Example of Customizable Deloitte Methodology


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13.1 13.2 13.3 13.4 13.5 13.6 13.7 13.9 13.10 13.11 13.1213.8

ComplianceConfirmationMgmt Dashboard Trader Tools Financial ReportingMarket RiskCredit Risk RegulatoryContract Scheduling SettlementsMtm, P&L, Position

1 Data Management1.1 1.2 1.3 1.4 1.5 1.6 1.7

Counterparty Prices Volatilities and Correlations

FX and IR Weather Market Data Other

2.1Production

Forecasting

3.1Contract

Management

4.1Credit Limit

Management

5.1Pre-Trade

Analysis

5.2Deal/Trade

Approval

5.3Natural Gas Physical

6.1Confirmation

Generation

7.1Book Structure

7.2Curve

Management

8.1 Gas Scheduling

9.1Natural Gas

Settlement

9.2

Pipeline

Settlement

10.1

ASC 815

Derivative

Accounting

11.1

User/Group

Management

12.1

Baseline

Information

2.2Revenue

Forecasting

3.2Counterparty

Management

4.2Credit Exposure

Calculation

5.4Natural Gas

Storage

5.5Natural Gas

Financial

5.6Natural Gas Transportation

6.2Confirmation

Management

7.3Market Risk

Valuation

7.4Risk Limit Management

8.2Power

Scheduling

9.3Crude Oil

Settlement

9.4Storage

Settlement

10.2

Tax

11.2

Access

Mgmt

12.2

Forecasting

2.3Asset

Optimization

3.3Contract

Document Mgmt

4.3Collateral

Management

5.7Fuel Oil

6.3Deal Modification Notification

7.5Scenario

Management

7.6Stress Testing

8.3Crude Oil

Scheduling

10.3

AR/AP

11.3

Security Access

Monitoring

12.3

Inventory

Management

2.4Scenario

Analysis

4.4Credit Scoring

5.11CrudePhysical

5.12Crude- Storage

6.4Confirmation Document Mgmt

7.7Risk Reporting

7.8P&L Attribution

8.4Other Commodity Scheduling

9.7Exchange Traded Settlement

9.8

3rd Party

Fee Settlement

10.4

Cash

Management

11.4 Application Configuration Mgmt

12.4

Simulations

4.5Margining

5.13CrudeFinancial

5.14Crude-

Transportation

5.15Other Commodity Physical

4.6Advanced Credit Analytics

5.16Other Commodity Storage

5.17Other Commodity Financial

5.18Other Commodity Transportation

4.7Exposure

Monitoring

5.19Foreign

Exchange

5.20Interest Rates

5.21Structured Deals

4.8Credit Reporting

5.22Freight & Vessel Chartering

5.23Emissions

4.9Cash Flow Forecasting and Mgmt

7.9Advanced Risk

Analytics

8.5Freight Vessel

Scheduling

9.9FinancialTransaction Settlement

9.10

Dispute

Resolution

10.5

Trading sub

Ledger Mgmt

8.6Rail Car

Scheduling

9.11Broker

Reconciliation

9.12

Broker

Settlement

8.7Truck

Scheduling

9.13Vessel Freight

Settlement

9.14

Rail Settlement

8.8Terminal

Scheduling

9.15Truck

Settlement

9.16Emissions

Settlement

11.5

Workflow/Job

Scheduling

7.11Risk Policy Compliance Monitoring

7.10Valuation

Modeling

8.9Inventory

Management

9.17Terminal

Settlement

9.18SettlementDocument Mgmt

10.6

GL Interface

11.6 Application DataManagement

12.5

Capture of

Emissions

Reporting Requirements

5.24DFElectronic Communication Capture

5.25DFPost Trade Surveillance

5.26DF Transaction Reporting to Regulator / SDR

7.12 DF Real Time Limit Management

7.13 DF Position Limit Monitoring

7.14 DF Capital Calculation and Margin Requirements

5.5DF Confirmation

Reporting to SDR / Regulators

9.19 Interface to DCMs and DCOs

9.20 Reporting to SDRs / Regulators

10.7 Economic to Accounting P&L Reconciliation

14. Governance and Compliance

New Process

Existing Process with significant

Dodd-Frank impact

Existing Process with limited Dodd-

Frank impact

14.1 SD /MSP Registration and Updates

3.2a Counterparty Eligibility Verification

14.2 Quarterly Risk Mgmt Program Audits

7.16 DF Portfolio Reconciliation

7.15 DF Daily MTM Reporting by Customer

7.17 DF Portfolio Compression Updates

14.7 Data Retention Standards

14.5 Compliance Annual Report

3.2b Special Entity Dealing Requirements

3.2c Swap Disclosures to Counterparties

14.6 Business Continuity and Disaster Recovery

5.27DF End User Exception Reporting

Key

14.3 General DFA Compliance Standards

14.4 Risk Mgmt Program – DFA Requirements

Heat Map to visualize the impact of

Dodd-Frank Tile VII regulations on

different aspects of business – capital,

liquidity, legal entity structure,

compliance, information systems,

workforce etc.

A library maintaining Dodd-Frank

Title VII rules from CFTC and SEC

A list of implementation activities

and interdependencies to drive

project planning for internal

regulatory compliance programs

A Gap assessment to

determine the compliance

level, gaps and mitigating

steps

Dodd-Frank

Diagnostic Tool

Self and Gap

Assessment

Library of Rules

Project

Management

Impact

Assessment

Advanced

Reporting

Derivatives

Trading

Lifecycle

Map

An interactive derivatives trade lifecycle

mapped to relevant rules and

identifying existing and new business

processes impacted as a result of

Dodd-Frank regulation

Interactive dashboards and report

with drill-down capabilities

1

2

3

4

5

6


Illustrative Examples of QuickStart Methodology & Components

QuickStart may provide an out-of-the-box solution for assessment and implementation planning

Workplan

The workplan will serve as a project plan and status

dashboard. It can be customized to include specific project

dates, milestones, and project team members

Deliverables

Deliverables include the Final Report outline, final

presentation outline, gap assessment inventories, and

implementation plans

Templates

The templates include customizable work products including

rules/requirements inventories for each rulemaking area

Reference Guide

The reference guide provides step-by-step instructions for

project setup, population of templates, and how to produce

the final deliverables

ID Reference Requirement (Rule Text) Gap Assessment Tasks/Activities Potential Implementation Steps IT Implications

Comment /

Questions /

Observations

Gap Rating

Primary

Point of

Contact

Level of

Effort

1

2

4 45.2 Swap

Recordkeeping

(b) Recordkeeping by non-SD/MSP

counterparties. All non-SD/MSP

counterparties subject to the

jurisdiction of the Commission shall

keep full, complete, and systematic

records, together with all pertinent

data and memoranda, with respect to

each swap in which they are a

counterparty, including, without

limitation, all records demonstrating

that they are entitled, with respect to

any swap, to elect the clearing

requirement exception in CEA

section 2(h)(7).

GAP Assessment

1) Evaluate whether current processes and procedures

support maintaining complete and systematic records of

the activities related to swaps including all pertinent

records and memoranda.

Implementation Steps

1) Develop a process and procedure to retain records of

swap transactions for a minimum of the life of the swap

plus five years, per the requirements of subpart 45.3 (c)

2) Ensure that the infrastructure for recording "full,

complete and systematic" information related to swaps to

which you are a counterparty, is in place.

3) Ensure that the recordkeeping systems retains these

records for a period of 5 years. These records can be in

any form- electronic or paper (You have the option of

keeping these records in paper form even if they were

created electronically) provided that the records are

retrievable within five business days for the period during

which the records are required to be retained).

4) Determine the data format required for reports

submitted to the CFTC under this section (§ 45.2(h)).

5) Ensure that the capability exists to submit the required

Ensure that systems

are capable of

capturing new data

record fields

14 45.3 Swap data

reporting :

Creation data

(b) Off-facility swaps subject to

mandatory clearing. For all off-facility

swaps subject to the mandatory

clearing requirement, except for

those off-facility swaps excepted

from that requirement pursuant to

CEA section 2(h)(7) and those off-

facility swaps covered by CEA

section 2(a)(13)(C)(iv), required

swap creation data must be reported

as provided in paragraph (b) of this

section. (1) The reporting

counterparty, as determined

pursuant to § 45.8, must report all

primary economic terms data for the

swap, within the applicable reporting

deadline set forth in paragraph

(b)(1)(i) or (ii) of this section.

However, if the swap is voluntarily

submitted for clearing and accepted

GAP Assessment

1) If you have been designated as the reporting

counterparty : Determine if the swap has been voluntarily

submitted and accepted for clearing by a DCO before the

applicable deadline. If the swap is accepted before the

counterparty reports, then it shall be excused from the

reporting requirements.

If (1) doesn't apply, then:

Implementation Step

1) Develop process controls to check whether transaction

data is reported and is accurate (with counterparties or

SDRs).

(Refer to RTR Task Checklist - step 1. of 43.3(a)(2)

regarding data accuracy)

2) Determine internal ownership of the swap data

repository reporting responsibility within client.

(Refer to RTR Task Checklist - step 1. of 43.3(a)(1)

regarding data accuracy.)

1) If information is not currently captured, develop a

process/capability to capture this information.

2) Establish necessary controls to verify required

information is captured.

3) Update policies and procedures to ensure that all

primary economic terms data is reported in the timeframe

required by the section.

4) Refer to RTR Task Checklist - Task 5 of 43.3(a)(1) with

respect to timing requirements for swap data submission.

Gap Assessment

45.2 Swap Recordkeeping

§ Definitions

Reference # Activities Responsible Inform Priority Effort Gap Action Steps Start Date End Date

2 Form a DFA Working Group PMO All High Low High

2.1 Identify all stakeholder groups that will be impacted by the DFA Implementation, and identify

a representative from each group for participation in the Working Group

2.2 Determine how communications will be handled with the Working Group

2.3 Determine how often the Working Group will meet on a formal basis (for status meetings,

etc.)

2.4 Agree on a Project Terms of Reference

8/1/2012 8/31/2012

3 Form a DFA Steering Committee PMO All High Low High

3.1 Identify members for DFA Steering Committee

3.2 Determine how communication will be handled with the Steering Committee

3.3 Determine how often the Steering Committee will meet on a formal basis

8/1/2012 8/31/2012

4 Educate stakeholder groups on Dodd Frank Act and the impact to client PMO All High High High4.1 Determine which stakeholder groups should receive DFA Primer Training

4.2 Develop material and schedule sessions8/1/2012 8/31/2012

5

Develop and maintain a list of counterparties and their legal designation, and

develop process to revisit designation quarterly/semi-annual/annual.

Client Personnel

#5All Medium Medium Low

5.1 Develop due diligence process for new counterparties to ascertain their registration status.

Revisit this process quarterly/semi-annually/annually.

5.2 Confirm that legal entity identifier utility will be available through the CFTC or another

mechanism

5.3 Determine means of capturing registration status in the reporting solution to be enable

automated reporting.

TBD TBD

6

Determine if client should report all swap transactions to a (preferred) SDR,

regardless of if reporting counterparty or not Client Personnel

#4All Medium Medium High

6.1 Work with preferred SDR to understand reporting capabilities and if all swaps can be

reported

6.2 Develop process to report all swaps TBD TBD

I. General Project Considerations

II. Legal Considerations/Counterparty Management Activities

Implementation Plan Template


Project Leader: Deloitte Superstar Project: Client X DFA Compliance Readiness Date: w/c 5/14/12

Major Activities On-Site Off-Site

1 Perform Qualitative Assessment of Transaction Types and Business Strategies x

2 Summarize and Finalize Assessment Notes x x

3 Gather Transaction data for Quantitative Analysis x

4 Confirm data exclusions for de minimus calculation x x

5 Confirm data inclusions for Special Entity calculation x x

6 Perform Gross Notional Value Calcs x x

7 Stress Test Gross Notional Value Calcs x x

8 Complete First Draft of Qualitative/Quantitive Analysis (Deliverable: Draft Classification Results) x x

9 Faciliate Team discussion for Classification Determination x

10 Agree Classification and Document Conclusions (Deliverable: Final Classification Results) x

11 Perform Project Kick-off x

12 Facilitate Team discussion for classification compliance strategy x

13 Work with External Counsel to draft Compliance Delay Memo x

14 Analyze client's existing process documentation x x

15 Perform Initial Analysis for Gap Assessment x x

16 Develop RMA Material for client staff; Conduct Info Sessions x x

17 Customize Requirements Assessment Template/Tool x x

18 Conduct Interviews for Gap Assessment (Rule-by-Rule) x

19 Position Limit Reporting Gaps x

20 Data Record Keeping and Reporting/Real Time Reporting Gaps x

21 Other (Addl Rules based on Classification Result) x

22 Document findings in DFA Template/Tool x x

23 Create detailed Action Items List and validate findings x x

24 Agree Gap Assessment Actions (Deliverable: Detailed Actions Inventory) x

25 Develop Implementation Strategy x x

26 Map detailed Actions to Task Owners x x

27 Develop Initial Recommendations on Resources, Task Owners, Priorities x x

28 Review Iniital Recommendations with client staff and close remaining questions x x

29 Develop Implementation Plan x x

30 Agree Implementation Plan (Deliverable: Project Plan and Timeline) x

Quickstart begins at Task #11

Objectives Schedule


Specific internal audit considerations


Audit Committee Considerations


Implementation Financial Reporting

High level implementation plans, timeline and

resourcing

Tone at the top – management support for a

culture of compliance

Risk management process

Role of Chief Compliance Officer and

responsibilities

Impact on internal audit function and reporting

Change management

Impact of new external and internal reporting

Accounting policy changes affected by Dodd-

Frank

Impact on earnings, equity, key ratios,

performance indicators and compensations

Internal control certifications

Disclosure requirements

Impact on the board and board committees Commercial and Operational Impact

Risks or changes relevant to board and its

committees – level of commitment, internal

controls and certifications

Education and training of board members

Impact on risks and oversight responsibilities

How this implementation affects competitive

position vs. competitors

Assessments of new controls

Improvement opportunities and controls

rationalization

Impact on management reporting within the

enterprise – planning, budgeting and

forecasting

Communication to stakeholders on impact

While major responsibility lies with management and the Chief Compliance Officer, the implementation

of these new rules should have thoughtful and ongoing oversight by the Audit Committee.


Recap and opportunities

• Understand and confirm key stakeholders expectations of internal audit - including

audit committee and other key committees

• Validate expectations around Dodd-Frank assurance requirements

• Become a key player in the risk management program

• Dodd-Frank Act will impact people, process, governance & controls and technology –

be prepared to factor this into the internal audit planning process and resources

• Forward looking organizations see regulatory changes as an opportunity to simplify,

standardize, and transform their current processes and culture

• Engage executives and board members in thoughtful consideration of potential risks

• Continue being a trusted advisor and don’t assume that Dodd-Frank is ―going away‖


Internal audit = Assurance, Insight, and Objectivity 1

1 Internal Audit Value Proposition. Insight: Delivering Value to Stakeholders 2011 by The Institute of Internal Auditors Research Foundation


Questions & Answers


Contact information

Paul Campbell

Deloitte & Touche LLP

(713) 982-4156

[email protected]


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