Energy Trading Operations
& Technology Summit 2011
Presentation: Swap Data Reporting – Building a robust compliance reporting regime Arun Karur, Global Head of Commodities,
Sapient Global Markets
Regulatory Reporting |
building a robust compliance regime ETOT Summit 2011
3 © COPYRIGHT 2011 SAPIENT CORPORATION | CONFIDENTIAL
Contents
Title
Regulatory Reporting Landscape
1 Industry Overview
2 Reporting Scope
3 Challenges and Opportunities
Solution Roadmap
4 Where do you start?
5 Execution Roadmap
6 How do you stay compliant?
7 Solution Options
Conclusion
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Regulatory Reporting Landscape
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Regulatory Reporting Landscape
G20 Commitment: “OTC derivative contracts should be reported to trade repositories”
• However, a patch-work of similar yet divergent rules have emerged significantly
complicating compliance for global market participants
• Dodd-Frank sets the bar high: Real-time price report
Primary economic terms, confirmation, daily snapshot & valuation (effectively all the terms necessary to value the instrument)
Limited variation by asset class
• Non-G20 jurisdictions have overlaid requirements on that:
Complicate the business logic needed to comply with local reporting rules (proprietary formats, reporting entity classification)
Expand the product scope and scale beyond OTC (i.e. Israel w/ FX spot & repo)
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Regulatory Reporting Infrastructure
Australia
TR consultation in flight
European Union
EMIR/MiFid consultations continue DTCC established TRs
USA
Dodd Frank rule-making in progress Real-time, PET, confirmation, daily snapshots & valuations
Canada
1st of 8 Consultation papers issued. Initial paper relates to TRs
Japan
DTCC licensed for CDS TR
Singapore
Considering DTCC for TR
Hong Kong
HKMA and HKEX announce TR offering. TR consultation underway
India
Expect CCIL to establish TR
China
CFETS is effectively a local TR and trading venue
Korea
BoK acts as a TR
Taiwan
Central bank TR consultation paper in-flight Gretai Securities Market to set up TR
Spain
BME (Spanish Exchange) and Clearstream plan to launch Spanish TR
Brazil
CETIP operating as a TR
Israel
FX transaction & balance reporting to central bank
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Global Regulatory Landscape
• Timing challenges are significant and the potential for regulatory arbitrage and
market fragmentation remains a high risk that must be monitored
J MF A M JJ A S NO D2010
J MF A M JJ A S NO D2011
J MF A M JJ A S NO D2012
Glo
bal
No
rth
Am
eri
ca
2009
EUA
ust
ralA
sia
Dodd Frank ActPassed
MiFIDConsultation
Paper
Financial Instruments and Exchange act
Other date of note
G20 Statement on derivatives
CESRPublication
European Markets Infrastructure Legislation
consultation begins
CSA Consultation Paper publication
FSB PaperPublication
CPSS /IOSCO
Publication
“Initial Proposal”
SGX CCP live for IRS
HKMA and HKEx announceCCP and TR for OTCD
Legislation or Directive Publication Date
BCBS Publication on CCP
Target Date forDraft Capital Directive IV
Expected date for federal legislation/ rule-making
ImplementationTarget date for
New OTCD regulations
SFC to consult marketOn new OTCD regulations (Q3)
JSCC to startClearing CDS (Q2)
Draft legislations expected on OTCD (Q2)
“Final Proposal” “Implementation”
Effective Date for CCP and TR
Target date for establishment of CCP and TR (Q4)
Possible start of operation ofShanghai Clearing House
ODRF PaperPublication
Revised implementation timing of Dodd-Frank
Target date for title VII rule-making for Dodd-Frank
Start of CSA Consultation period
End of CSA Consultation period
G20 Derivatives Deadline
G20 Meet in Cannes, France
ODSG Commitments Letter
Basel III rules finalised
CPSS-IOSCO Guidance on Sound X-border Oversight (Date tbc)
FSB Progress Report
2nd FSB Progress Report
CPSS – IOSCO Guidance on TR
CPSS – IOSCO Guidance on financial Market Infrastructure
Mifid3 proposal
Adoption of EMIR legislation
MiFID3 Adoption (tbc)
ESMA Created
TR Consultation Paper submissions
CCP Consultation ends
BME TR due to launch
Anticipated MiFID
Adoption
Market Abuse Directive
Basel III rules implemented IOSCO Report on OTCD trading requirements
with respect to products/participants
Legislation due and not delivered
Poland launches CCP
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Trade Reporting Obligations
• Whilst trade reporting obligations are not yet clear under EMIR, Dodd Frank provides a very prescriptive view
in terms of content and timeliness
• The role of a TR (or “SDR” under Dodd-Frank) will be to collate data from Market participants to provide
public and regulatory reporting
• ISDA RFP’s are in-flight to create ‘industry preferred’ TR’s though a number of jurisdictions have announced
local TR’s due to issues/concerns with cross-jurisdiction data sharing
Industry Mandated SDR for Relevant Asset Class
Real time price
disseminationplatform
Other regulator
mandated public reporting
Regulator portal
Markets Participants(Bearers of Statutory Reporting Responsibility)
SEFs
DCOs Reports,Recon,Query,
Tracking
real time
basic data
regulatory reporting
detailed data daily updates from DCOs
real-time and
regulatoryreportingnot otherwise
covered
Red arrows
potentially
intermediated
through confirm
or middleware
providers
DF Requirements
TR Landscape
Source: Mserv industry presentation - Jan 2011 Source: Mserv industry presentation - Jan 2011
9 © COPYRIGHT 2011 SAPIENT CORPORATION | CONFIDENTIAL
Impacts and Challenges
• Provide the necessary controls around: Trade identifiers (USI) Counterparty identifiers (UCI/LEI) Product taxonomy (UPI)
Standardization
Aggregation
Orchestration
Reconciliation
• Across agents, 3rd parties, and market infrastructure components • Business logic variation by regulatory jurisdiction:
Timing Content & Message Quality
As a result of legislation being passed globally, operating models and the related infrastructure will have to
undergo significant enhancements to be able to process and report on trades
• The ‘right’ level • Inclusive of agents/3rd party activity • Meaningful analysis(by regulators) • Potential for multi-point reporting
• Front-to-back (internally) • With TR(s) • With counterparties
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Today’s Discussion
Dodd-Frank Act
Title I - Financial Stability
Title II - Orderly
Liquidation Authority
Title III - Transfer of
Powers to the Comptroller, the FDIC, and
the Fed Title IV -
Regulation of Advisers to
Hedge Funds and Others
Title V - Insurance
Title VI - Improvement
s to Regulation
Title VII - Wall Street
Transparency and
Accountability
Title VIII - Payment,
Clearing and Settlement Supervision
Title IX - Investor
Protections and
Improvements to the
Regulation of Securities
Title X - Bureau of Consumer Financial
Protection
Title XI - Federal Reserve System
Provisions
Title XII - Improving Access to
Mainstream Financial
Institutions
Title XIII - Pay It Back Act
Title XIV - Mortgage
Reform and Anti-
Predatory Lending Act
Title XV - Miscellaneous Provisions
Title XVI - Section 1256
Contracts
Today’s scope of
discussion –
Title VII
And
Large Trader
Reporting
• OTC derivative market
participants have
committed to a number
of transparency and
standardization targets
driven either by the
industry or by the
regulatory community
11 © COPYRIGHT 2011 SAPIENT CORPORATION | CONFIDENTIAL
Scope and Timelines
• Whilst expectations within the industry are that deadline for final rules is likely to slip
to early 2012, the scale of the change required remains
Phase I: Rulemaking Phase II: Implementation Phase III: Effectiveness Regulators propose rules and solicit comments
Most rules become effective Additional rule-by-rule phase in
Major elements of Title VII, Large Trader Reporting
Framework and definitions
Clearing and trading requirements
Regulation of SDs and MSPs
Other
- SEC and CFTC oversight - Product definitions - Participant definitions
- Mandatory clearing - Mandatory electronic trade executions - Trade reporting
- Registration - Capital and margin requirements - Business conduct standards
- Swaps push-out - Position limits
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Scope – Title VII Functional Requirements
NRP Functional Requirements
Reporting PartyNon- Reporting
Party
Elec. Trading
Venue (SEF)
Middleware/
Affirmation
CCP (DCO)
Trade Repos. (SDR)
Industry Data
Solutions
*Real-time, PET, Confirmation, Valuation, Public and Position Reporting
ó
ó
1 2 3 4
5
Transparency Core Process*
Verification
Acknowledgement Processing
PDF Signing
Daily Position Reporting
Transparency Fundamental Requirements - Context Diagram
RP Functional Requirements
Reporting party eligibility
RT Message Creation
Verification
Submission
USI allocation
UPI designation
LEI/UCI designation
Reconciliation - message
Reconciliation – trade
Reconciliation – dataM’ware Functional Requirements
Universal templates
Template build
Connectivity to TR
USI allocation
Affirmation message
PDF submission (inc. header)
Position submission (TRR only)
Backload acceleration strategy
Backloading tools
SEF Functional Requirements
Submission – RP
Submission – NRP
USI allocation
Control Framework
Client onboarding
CCP Functional Requirements
USI allocation
TR submission
Close-out messaging (RP/NRP)
Upload – Pre-enactment
Upload – Post-enactment
Upload – Transition
Control Framework
Confirmation message
Valuation submission
Position submission
Client onboarding
Backloading
TR Functional RequirementsRecording to tape
Acknowledgements
PET record
Reconciliation – positions
Reconciliation – trades
Trade record enrichment
Data backfill
Interim industry data solution
Interim control reports
Consume and store PDF
Upload – Pre-enactment
Upload – Post-enactment
Upload – Transition
Update valuations
Real-time dissemination
Control Framework
Snapshot reporting
Client onboarding
Control Framework
Upload – Pre-enactment
Upload – Post-enactment
Upload – Transition
PDF submission (inc. header)
Valuation message
Valuation discrepancy mgt
Collateralised Trade report
Daily Position Reporting
Onboarding strategy
Industry Data Requirements
UPI Solution
USI Solution
LEI/UCI Solution
Event ID solution
Scope of existing DTCC PMO
Non Functional Requirements
CPSS – IOSCO Standards
Marketing and outreach – Dom. Regulators
Lobbying and outreach – Intl. Regulators
SDR registration
Client confidentiality
TR charging models
Capture extended build costs (TR, RP, Mware)
Capture extended compliance cost (tiered)
Capture extended implementation cost (tiered)
Paper backloading
Backloading reconciliation
Independent price valuation
Market
InfrastructureTrade processing Reporting
Market
Participant4 Reporting in/out Industry solution
ó
Process Decision
KEY: KEY
13 © COPYRIGHT 2011 SAPIENT CORPORATION | CONFIDENTIAL
Scope – Large Trader Reporting
Commission
•Rule 13h‐1 and Form 13H under Section 13(h)
•Identifying a large trader
•Obtain trading information
Large Trader
•Classification by volume or market value
•File Form 13H to identify and disclose
•LTID assigned and shared with BDs
•Provide Quarterly and Annual updates
Broker Dealer
•Should register
•Maintain 2 new data elements – LTID and time of transactions executed
•Report to Commission via EBS
•Monitor client accounts
14 © COPYRIGHT 2011 SAPIENT CORPORATION | CONFIDENTIAL
Scope – Large Trader Reporting (Key Open Issues)
• Determining Large Trade Status based on trading activity when the broker-dealer acts
in different capacities (e.g., agency, riskless principal, proprietary)
• Large Trader ID format
• Inclusion of trading activity in EBS reports that are not traditionally reported today
• Responsibility for responding to Large Trader Reporting requests by broker dealers
across the trade process (introducing, self-clearing executing broker, non-self clearing
executing broker, clearing broker)
• Unidentified Large Trader identification –internally and on EBS requests both before
and after a customer confirms they are not a Large Trader
• Availability of Electronic Blue Sheets record layout
• Impact to current EBS practices, e.g., average price account reporting
• Necessity of furnishing LTID and execution time on Exchange SRO EBS Requests
• Availability of additional details /specifics on SEC Large Trader Requests
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There are challenges…
Fears
Deciphering the legislation is a uphill task
High Capital Cost
Slowdown in trading as firms fret over potential legal
repercussions from conduct
Mandatory clearing for end users of derivatives
Increased entry barriers for new
Uncertainties
Inability to predict the future shape of legal landscape
Legality of some trades
Classifications, Exemptions
CFTC, SEC differ on many rules
Legal entities, global jurisdiction, territoriality
Doubts
Data confidentiality
Regulators ability to meet the deadlines
No clarity on what to report and how to report and how
will the data be used
Exposures are seen in combination with the
underlying physical position
Risk Management activities should not be penalized
16 © COPYRIGHT 2011 SAPIENT CORPORATION | CONFIDENTIAL
…but also opportunities
Build a compliance driven organization – culture, process,
people
More data will produce more opportunities for physical asset
managers looking to optimize their hedging activities
IT investments in middleware, messaging platforms, system
consolidations will lead to making better business decisions
Firms need to view this investment of time and money as a vehicle for
strategic and competitive differentiation
17 © COPYRIGHT 2011 SAPIENT CORPORATION | CONFIDENTIAL
Solution Roadmap
© COPYRIGHT 2011 SAPIENT CORPORATION | SCOTIA DF RESPONSE PROGRAMME | 14th JUNE 2011 18
TITLE VII—WALL STREET TRANSPARENCY AND ACCOUNTABILITY
Sec. 7 01. Short title.
Subtitle A—Regulation of Over-the-Counter Swaps Markets
PART I—REGULATORY AUTHORITY
Sec. 7 11 . Definitions.
Sec. 7 12. Review of regulatory authority .
Sec. 7 13. Portfolio margining conforming changes.
Sec. 7 14. Abusive swaps.
Sec. 7 15. Authority to prohibit participation in swap activ ities.
H. R. 417 3—5
Sec. 7 16. Prohibition against Federal Government bailouts of swaps entities.
Sec. 7 17 . New product approval CFTC—SEC process.
Sec. 7 18. Determining status of novel derivative products.
Sec. 7 19. Studies.
Sec. 7 20. Memorandum.
PART II—REGULATION OF SWAP MARKETS
Sec. 7 21. Definitions.
Sec. 7 22. Jurisdiction.
Sec. 7 23. Clearing.
Sec. 7 24. Swaps; segregation and bankruptcy treatment.
Sec. 7 25. Derivatives clearing organizations.
Sec. 7 26. Rulemaking on conflict of interest.
Sec. 7 27 . Public reporting of swap transaction data.
Sec. 7 28. Swap data repositories.
Sec. 7 29. Reporting and recordkeeping.
Sec. 7 30. Large swap trader reporting.
Sec. 7 31. Registration and regulation of swap dealers and major swap participants.
Sec. 7 32. Conflicts of interest.
Sec. 7 33. Swap execution facilities.
Sec. 7 34. Derivatives transaction execution facilities and exempt boards of trade.
Sec. 7 35. Designated contract markets.
Sec. 7 36. Margin.
Sec. 7 37 . Position limits.
Sec. 7 38. Foreign boards of trade.
Sec. 7 39. Legal certainty for swaps.
Sec. 7 40. Multilateral clearing organizations.
Sec. 7 41. Enforcement.
Sec. 7 42. Retail commodity transactions.
Sec. 7 43. Other authority .
Sec. 7 44. Restitution remedies.
Sec. 7 45. Enhanced compliance by registered entities.
Sec. 7 46. Insider trading.
Sec. 7 47 . Antidisruptive practices authority .
Sec. 7 48. Commodity whistleblower incentives and protection.
Sec. 7 49. Conforming amendments.
Sec. 7 50. Study on oversight of carbon markets.
Sec. 7 51. Energy and environmental markets advisory committee.
Sec. 7 52. International harmonization.
Sec. 7 53. Anti-manipulation authority .
Sec. 7 54. Effective date.
Subtitle B—Regulation of Security -Based Swap Markets
Sec. 7 61. Definitions under the Securities Exchange Act of 1934.
Sec. 7 62. Repeal of prohibition on regulation of security -based swap agreements.
Sec. 7 63. Amendments to the Securities Exchange Act of 1934.
Sec. 7 64. Registration and regulation of security -based swap dealers and major security -
based swap participants.
Sec. 7 65. Rulemaking on conflict of interest.
Sec. 7 66. Reporting and recordkeeping.
Sec. 7 67 . State gaming and bucket shop laws.
Sec. 7 68. Amendments to the Securities Act of 1933; treatment of security -based
swaps.
Sec. 7 69. Definitions under the Investment Company Act of 1940.
Sec. 7 7 0. Definitions under the Investment Advisers Act of 1940.
Sec. 7 7 1 . Other authority .
Sec. 7 7 2. Jurisdiction.
Sec. 7 7 3. Civ il penalties.
Sec. 7 7 4. Effective date.
Put in place a Legislative Response Programme
• Perform an assessment of trading activity and develop a view in terms of registration
• The next step is for the organisation to develop an understanding of the impact of this view on their infrastructure and operating models
• The objective of the programme will be to develop a well considered target state and a roadmap for its delivery
• Recognise the need for strong PMO
coordination with engagement required from FO, Risk, Legal, Compliance Tech and Ops across multiple locations
Define Eligibility
Interpret rules
Interpret rules
Define policy
Assess Impact
Design Target Model
Develop Roadmap
Execute Strategy
Monitor Regulatory Landscape
Assessment of intended scope and potential high level implications of legislation
Analysis of business model in relation to qualifying criteria to quantify eligibility for act provisions
Internal interpretation of act provisions by legal counsel
Development of internal compliance policy and procedures
Assessment of current business model and associated gap analysis to requirements for compliance
Definition of a target state factoring in potential opportunities and requirements for compliance
Creation of a justified and reasoned roadmap to deliver desired results
Legislative Response Programme – Context Diagram
Pro
gram
me
Man
age
me
nt
Off
ice
19 © COPYRIGHT 2011 SAPIENT CORPORATION | CONFIDENTIAL
Conceptual Approach to Self Assessment
20 © COPYRIGHT 2011 SAPIENT CORPORATION | CONFIDENTIAL
Understand the Transaction Data Flows…
21 © COPYRIGHT 2011 SAPIENT CORPORATION | CONFIDENTIAL
and the Format Complexities
• Capturing the details of complex derivative
trade types requires a comprehensive
format
• SDRs, DCOs, and even regulators are
adopting FpML to support SDR reporting +
other processes (including clearing and
regulatory reporting)
• ISDA’s FpML group has set up working
groups to support these areas, including
Regulatory Reporting
Commodity (Regulatory) Reporting
Business Processes (including clearing)
• Most derivatives firms will be affected by
these tech standards
• To be successful, it’s critical to keep up to
date with them
<publicExecutionReport
fpmlVersion=“5-3”>
<header>
<messageId>123</messageId>
<sentBy>NRGCORP</sentBy>
<sendTo>SDR</sendTo>
</header>
<correlationId>123</correlationId>
<trade>
<tradeHeader>
<!-- ... -->
</tradeHeader>
<commoditySwap>
<!-- ... -->
</commoditySwap>
</trade>
</publicExecutionReport>
22 © COPYRIGHT 2011 SAPIENT CORPORATION | CONFIDENTIAL
TR Target Operating Model & Automated TR ‘Hub’
TRANSACTION REPORTING HUB
Data Sourcing
Import Txns
Exception – I
Store
Normalise
Filtering
Rules
Reportable
Txns
Audit Trail
Validation
Rules
Validate
Exception - II
Audit Trail
Enrichment &
Transformation
Import Static
Fill Gaps
Submission
Intermediary
Response
Handling
Exception - III
Audit Trail /
History
Transform
Multiple
Regulators
MI & Analysis
Completeness Accuracy
Exception Management Workflow
Configurable
Workflow
Notification &
EscalationManual Overrides
& Audit Trail
3rd
P
A
R
T
Y
I
N
T
E
R
M
E
D
I
A
R
Y
R
E
G
U
L
A
T
O
R
(s)
QA / F2B Testing (Completeness & Accuracy embedded in TRHub)
Executive Forum (Quarterly)
Daily Monitoring / Assessment & Change (Quarterly)
Regulatory Reporting Forum (Monthly)
Full F2B
Trade
Life
Cycle:
New
Cancel
Amends
Exceptions
Exceptions
Governance
Top down Assurance
People
Staff Awareness & Training
Bottom Up Assurance
Accountability &
Delegated Strategy
Roles & Responsibilities
Budget Allocation
Horizon Scanning
Change to BAU
Industry Interaction
Regulatory Interaction
So
urc
e S
yste
ms
Re
fere
nce
Da
ta
Syste
mG
eo
gra
ph
yP
rod
uct
Clie
nt
Instru
me
nt
Exch
an
ge
23 © COPYRIGHT 2011 SAPIENT CORPORATION | CONFIDENTIAL
Today’s Solution Options
Solution Options
Build Bespoke internally
Retrofit using existing reporting, middleware
solutions
Consider a fit-for-purpose market solution
(Sapient CMRT)
24 © COPYRIGHT 2011 SAPIENT CORPORATION | CONFIDENTIAL
Sapient CMRT Solution Architecture
Compliance Management & Reporting Tool
Data
Transformation
Filter
SEC
CFTC
Others
Presentation Layer
Reference Data
Managers
Scheduler Admin Module Exception Viewer Audit Log Viewer
Status
Dash Board
Rates
Murex
Adaptor
Raw
Data
DB
Commodities
Openlink
Solarc
Adaptor
Credit
Bespoke
Adaptor
Transformation Builder
Other
Bespoke
Adaptor
Aggregate
Lookup
Expressions
Custom
Message
Generation
FPML
CSV
XML
Other
Inbound
Adaptors
Messages Bus
Web Service
Flat File
Database
Others
SCML
Store
Interim
Data
Store
Outbound
Adaptors
Messages Bus
Web Service
FTP
CSV
SMTP
Msg.
Store
25 © COPYRIGHT 2011 SAPIENT CORPORATION | CONFIDENTIAL
Conclusion
• Regulatory Reporting is here to stay, will be global in nature and the
landscape will continue to evolve over the next 6-18 months
• Despite the unknowns and the challenges, firms have to take a
strategic view and turn this into an opportunity
• Formal legislative response programs covering legal, operations,
business process, IT and Infrastructure is a must have for organizations
• Solutions need to have the end vision in mind while having the ability
to be flexible to handle the current flux and short-term deadlines
• Building the compliance DNA for your organization
26 © COPYRIGHT 2011 SAPIENT CORPORATION | CONFIDENTIAL
Questions?
Arun Karur Global Head of Commodities Practice Sapient Global Markets, Houston [email protected] Ph. 713-493-6876