swap data reporting building a robust compliance reporting regime a. karur

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



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)


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


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



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


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


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


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


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


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




Update valuations

Real-time dissemination

Control Framework

Snapshot reporting

Client onboarding

Control Framework




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


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


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


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


…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


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


Conceptual Approach to Self Assessment


Understand the Transaction Data Flows…

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>


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


Today’s Solution Options

Solution Options

Build Bespoke internally

Retrofit using existing reporting, middleware

solutions

Consider a fit-for-purpose market solution

(Sapient CMRT)


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


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


Questions?

Arun Karur Global Head of Commodities Practice Sapient Global Markets, Houston [email protected] Ph. 713-493-6876

swap data reporting building a robust compliance reporting regime a. karur

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