Dodd Frank: Swaps Confirmations, Documentation, Reconciliation and Compression

Dodd Frank: Swaps Confirmations, Documentation, Reconciliation and Compression

What is the Dodd-Frank: Swaps Confirmations, Documentation, Reconciliation and Compression?

Section 731 of the Dodd-Frank Act added a new section to the Commodity Exchange Act (CEA), called Confirmation, Portfolio Reconciliation Portfolio Compression, and Swap Trading Relationship Documentation, Requirements for Swap Dealers and Major Swap Participants.

This section requires the Commission to prescribe standards for Swap Dealers (SDs) and Major Swap Participants (MSPs) related to the timely and accurate confirmation, processing, netting, documentation, and valuation of swaps. The regulations set forth the requirements for SDs and MSPs including:

  1. Swap trading relationship documentation for SDs and MSPs

  2. Swap confirmation

  3. Portfolio reconciliation

  4. Portfolio compression

Who will this section of Dodd-Frank affect?

  • Swap Dealer or Major Swap Participants:

This section of the Dodd-Frank act will directly affect all Swaps Dealers (SDs) and Major Swap Participants (MSPs) who trade in the US.

  • Non-Swap Dealers/Major Swap Participant (including end user):

The Regulation will also impact non-SD/MSPs as it will be their responsibility to manage and verify information relating to the documentation, affirmations, and reconciliations relating to their business and the SD/MSPs. If volumes are low, this can be done manually; in an institution with a large base of business, this may require automation.

What are the key points of Dodd-Frank Act: Confirmation, Reconciliation, Compression and Documentation?

1. Documentation

The Swap Trading Relationship documentation from SDs and MSPs must include the parties that have agreed on the process for determining the value of each swap, at any time from the execution to the termination, maturity, or expiration of the swap. The purpose of documentation is to ensure they are complying with margin requirements – Section 4s(e) and risk management requirements – 4s(j).

The documentation must include alternative methods for determining the value of the swap and a valuation dispute resolution process. In addition, the documentation must include a notice that, upon acceptance of a swap by a Derivatives Clearing Organization (DCO), the original swap is extinguished and is replaced by equal and opposite swaps between clearing members and the DCO.

A number of swaps are exempt from these relationship documentation rules, they are as follows:

  • Swaps that were executed prior to the compliance date of the final rules

  • Swaps that are executed on a designated contract market or

  • Swaps that are executed anonymously on a Swap Execution Facility (SEF) (provided certain conditions are met) or

  • Swaps that are cleared by a DCO

2. Swaps Confirmations

When a swap transaction is between a SD/MSP and a non-SD/MSP counterparty, the SD/MSP must send an acknowledgment of the trade rather than a confirmation. This must be done as soon as technologically practicable, but in any event by the end of the first business day following the day of execution.

The following swaps are exempt from the confirmation requirements:

  • Swaps that are executed on a SEF or designated contract market

  • Swaps that are submitted for clearing by a DCO (provided the transaction is submitted as soon as technologically practicable and confirmation of all terms of the transaction takes place at the same time as the transaction is accepted for clearing)

3. Swaps Portfolio Reconciliation

The final rules require SDs and MSP to engage in portfolio reconciliation with respect to swap transactions, other than those that are cleared by a DCO. The portfolio reconciliations can be performed bilaterally by the counterparties or by qualified third parties. In both cases, the counterparties are required to agree in writing to the terms of the reconciliation.

SDs and MSPs must reconcile swap portfolios with other SDs or MSPs on a schedule (daily, weekly, quarterly) depending upon the size of the portfolio. Discrepancies must be resolved immediately if possible (but no later than 5 business days).

The rules require that SDs and MSPs retain records for all portfolio reconciliations.

4. Swaps Portfolio Compression

The final rules establish certain offset and portfolio compression requirements and related recordkeeping obligations for SDs and MSPs. The requirements and obligations do not apply to swaps cleared by a DCO.

With respect to portfolios among SDs and MSPs, each must establish, maintain, and follow written policies for:

  • Terminating each fully offsetting swap in a timely fashion when appropriate

  • Periodically engaging in bilateral portfolio compression exercises when appropriate and

Periodically engaging in multilateral portfolio compression exercises when appropriate

Related regulations

If you are affected by the this regulation you may also be affected by these:

How can UnaVista help you?

UnaVista can assist you with a number of regulations thereby eliminating the need to build separate solutions for each business problem. Future regulations can be addressed via the platform as required, thereby enabling seamless evolution of your compliance solution.

Documentation is the basis for the economics/details of a trade, yet it can be drafted so uniquely that standardisation is a challenge to achieve. However, standardisation can remove elements of profitability as the customization is removed.

UnaVista can help organisations with their Documentation, Confirmation, Reconciliation & Portfolio Compression requirements. The UnaVista platform provides for the workflow and lifecycle management needed to comply with the Regulations. As UnaVista is an open system with strong integration, it can be used to complement existing confirmation systems or can be used as a stand-alone solution for an organisation.

Specifically, UnaVista can support:

  • Data Import – UnaVista can capture data from multiple sources, including a document or an e-mail; this enables organisations to use their documentation of a trade as the starting point for the confirmation/affirmation, reconciliation, and portfolio compression workflow.

  • Confirmation and Affirmation – UnaVista has a full confirmation module that is cross-asset by design and provides for real-time confirmation/affirmation. This includes both the block level and the allocations associated with it. UnaVista is flexible and can be customised for both the confirmation/affirmation data and the business processes around the confirmation (workflow).

UnaVista does not require an organisation’s counterparties to use our software. The module has been designed to support communication with other confirmation modules or, in the event that a counterparty does not have a confirmation system, they can use their email system for confirmation/affirmation.

  • Reconciliation of Data – UnaVista has a powerful reconciliation engine that can scale to large volumes, across multiple systems and multiple entities. Organisations using the UnaVista reconciliation engine can ensure that their information is fully reconciled regardless of the source. UnaVista provides for exception management and respects the time limitations set by the Regulators (through its ability to define rules within the module).

  • Portfolio Compression –UnaVista can highlight attributes of trades to make the recommendations for trades to be replaced and/or terminated. UnaVista can communicate with internal systems to suggest recommendations and can receive feedback on which actions were taken (i.e. termination). UnaVista can then perform the confirmations, reconciliations etc. to ensure that the workflow remains whole.

  • Aggregation of Data –UnaVista can aggregate data that is sourced from multiple systems, which can be both internal and external. For an SD/MSP that is communicating with a client for their trades, having a holistic view of the client and their activity is an added benefit of ensuring that the clients needs have been met as well as the regulations.

The aggregated view can be bespoke or tailored to each client, asset class or any other parameters. This flexibility enables organizations to customise their views to meet both their needs and their clients needs.

  • Exceptions Management – UnaVista provides for full exceptions management where the data does not reconcile, alerts and monitoring to enable the exceptions to be resolved quickly. The exception criteria can be defined for each organization as well as the alerts and their monitoring times. UnaVista provides dashboards for both actively managing the exceptions and displaying Management Information and Regulatory Reporting.

  • Full Audit Trail –UnaVista provides a full audit trail and history to comply with Dodd-Frank.

  • Workflow –UnaVista has been designed as a workflow solution in the post-trade, post-execution, and post-settlement space. UnaVista can provide full automation of the confirmations flow, as well as exceptions management, reconciliation, history, and information management around the confirmations process. UnaVista can be used as a stand-alone solution or can be integrated with existing solutions that an organization may have.

  • New Products – New products/instrument types can be added quickly to comply with Dodd-Frank.

  • Regulatory Compliance –UnaVista can help an organisation ensure that it is in full compliance, not only with Dodd-Frank regulation, but through all of the regulations that an organisation may need to comply with (EMIR, BASEL, MiFID………)