Sdr dodd frankbirdseyeview

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Frank Dodd Regulatory Reforms and its implications on Global Derivative Trading -- an executive summary

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Sdr dodd frankbirdseyeview

  1. 1. Frank/Dodd compliant Derivative TradingBirds Eye View - 2ndJune 2013raman@assetcorporation.netIntroduction2013 is a make or break year for anyorganization participating in the globalderivative markets. Title VII of the Dodd-FrankWall Street Reform and Consumer ProtectionAct (“Dodd-Frank”) [D/F][1] requires all tradeson qualifying derivative instruments to beexchange traded, cleared and reported topublic utilities known as data repositories.Exchange traded implies fungible assets withstandard contracts, terms and procedures.Clearing and Reporting a trade requiresstandardization at every level of a trade. Wewill run into mayhem if trading parties andtraded securities are not denoted by standardreferences.Staus QuoPrior to D/F, derivative trades were notcleared and firms assumed all theresponsibility, from trading throughsettlement, including book keeping,valuation, risk management andexecution, over the life of thederivative trade, resulting in significantmoral hazard, lacking --transparency,price discovery and fungibility--. Eachfirm had their own set of counterpartymnemonics, security identifiers andcustom valuations – makingreconciliation amongst firmsimpossible.Roles definedThe D/F act defines specific roles. Derivative MarketParticipants have to be registered as either Dealers(SD), Participants (MSP) and transact through venuessuch as SEF and DCMs and the D/F act assignsparticular responsibilities and obligations associatedwith each role. Registration procedures aredescribed in [4]. Firms may register with either NFAor CFTC.AbbreviationsSwap Dealers (SDs);Major Swap Participants (MSPs);Future Commission Merchant (FCM);Derivative Clearing Organizations (DCO);Swap Execution Facilities (SEF);Designated Contract Market (DCM);Central Clearing Party (CCP);Swap Data Repositories (SDR);Eligible Contract Participant (ECP)Unique Swap Identifier (USI) (aka UTI)Unique Trade Identifier (UTI) (aka USI)Unique Counterparty Identifier (UCI) (aka LEI)Legal Entity Identifier (aka UCI)Unique Product Identifier (UPI)The D/F Act defines the following roles:Trading entities (MSP, ECP);intermediaries (SD, FCM,MSP);Trading Venues (SEF/DCM);Clearing (CCP,DCO,FCM); andRepositories (SDR).Many basic questions come to mind, such as:What trades are qualifying?Who can trade?What assets are qualifying?Who must report?Are there exceptions to the rule?What are the time limits to report a qualifying trade?Where does one report the trade?What happens to reported trades?Who can access those trade records ?Without basic definitions and clarifications to these,trading over exchanges, clearing and reporting are justnot possible!
  2. 2. Processes DefinedUnder D/F, qualifying derivatives may betraded only over execution facilities(SEF/DCM) and have to be cleared throughdesignated clearing entities known asDerivative Clearing Organizations (DCO).Derivative transactions are to be submittedto 3rdparty repositories, SDR [2], so that alltrades are centrally available forcomprehensive oversight. Thus, in additionto imposing clearing and executionrequirements, the D/F Act creates robustrecordkeeping and real-time reportingregimes. Defines Product Eligibility –Securities that are subject to D/F act; andParticipant criteria including the so called End User Exemption as to who is subject to theseregulations [3].Standard ReferenceTo ensure uniform and universal counterparty identifiers, industry has adopted LEI framework.Trading parties must report trades using Legal Entity Identifiers not proprietary mnemonicscompanies had used. There are vendors providing LEI services. Adopting LEI and using thosestandard identifiers to denote trading partners industry wide and through the entire trade lifecycle will eliminate the usual problems faced when firms failed, such as LTCM in 1998, Lehmanin 2008, AIG-2008 and MFG in 2012. Under D/F, all counterparties in the OTC derivatives marketmust be self-registered as only trades between registered parties will be cleared by the DCO.DTCC launched the first LEI Solution on CICI Utility, accessible here www.ciciutility.org.ReflectionWhile D/F Act requires derivative trading firms to undertake major technology initiatives to becompliant, in the event of another failure in the derivative markets the world can anticipate anorderly cleanup and recovery due to these sweeping regulatory requirements. The world willnot be faced with such questions as: Who is this trade with? Or what is this instrument?. At theleast, that is the stated objective of the regulators behind these reforms. As a matter of fact,Title II of the Act, provides for orderly liquidation of firms when necessary. At an abstract level,as a result of the D/F Act, derivative trading becomes operationally and structurally similar tothe proven equity markets. Notwithstanding the growing pains, that is a good thing!References[1] http://www.charlierose.com/view/interview/12953[2] https://www.federalregister.gov/articles/2011/09/01/2011-20817/swap-data-repositories-registration-standards-duties-and-core-principles[3] https://www.federalregister.gov/articles/2010/12/23/2010-31133/swap-data-repositories#h-17[4] http://www.cftc.gov/IndustryOversight/IndustryFilings/index.htmAcknowledgementsThis brief is part 1 of our series on technology strategy and realization plan for trading derivativesecurities worldwide. The research and writing is subsidized in part by ClearTrack LLC, a leader inhelping major MNC implement Dodd/Frank compliant trading systems. Author acknowledgesvaluable insight and editorial input from Dhiren Rawal and William j Sweeney (risk, data, andanalytics LLC) . However, author is solely responsible for the content.

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