Preparing for Dodd-Frank Economic Terms

August 24, 2011 | Dan Reid

On July 14, 2011, the CFTC issued an Order providing relief from most provisions of Title VII of the Dodd-Frank Act that were slated to become effective July 16, 2011 to now expire upon the effective date of the final rules or December 31, 2011. This allows more time for comments and provisions that do not require a rulemaking but reference terms regarding swap entities or instruments that require further definition.

Besides the continued definition around what constitutes a swap and who is a swap dealer/major swap participant, the reporting requirements for transactions are still evolving. Organizations like DTCC and ICE are angling to become registered Swap Data Repositories (SDR), but terms and format must still be defined. It's a start to have some terms in place, but a true "data dictionary" and certified format/technology is necessary.

In the proposed rule “Swap Data Recordkeeping and Reporting Requirements: Pre-enactment and Transition Swaps”; 76 Fed. Reg. 22833 (Apr. 25, 2011), Proposed Regulation 46.2 would require counterparties to keep records of a minimum set of primary economic data relating to such swaps. Of particular note are the open-ended terms for "Data elements necessary for a person to determine the market value", "Other terms for determining settlement value, and "Any other primary economic terms(s) of the swap matched by the counterparties in verifying the swap." While mandated, there is also currently no source for Universal Counterparty Identifiers (UCI), no standard format for electronic representation of master and credit support agreements (although some exploration with FpML and FIX), and no standard for reference data.

Conclusion

Companies that want to prepare for the new regulatory landscape need to automate their systems and create a centralized electronic system of record for counterparties, agreements, and trades to prepare for evolving SDR reporting requirements. The current reporting terms in the proposed rules are a good place to start, but the reporting framework should be flexible to include other terms as they become finalized. Having access to all of the required information NOW not only provides for efficient and effective conformance to the regulation when it is in place, it also allows time to analyze the data and make any appropriate changes to have the optimal netted exposure and liquidity positions when exposed to oversight.

Proposed Rule:

"(1) Initial data report.

For each pre-enactment swap or transition swap in existence on or after April 25, 2011, the reporting counterparty shall report electronically to a swap data repository (or to the Commission if no swap data repository for swaps in the asset class in question is available), on the compliance date, the following:
    (i) All of the terms of the confirmation that are recorded in the automated systems of the reporting counterparty, if the terms so reported include all of the minimum primary economic terms data specified in the appendix to this part; or all of the minimum primary economic terms data specified in the appendix to this part;
    (ii) The Unique Counterparty Identifier required pursuant to § 46.4 of this part; and
    (iii) The following additional identifiers:
        (A) The internal counterparty identifier used by the automated systems of the reporting counterparty to identify the non-reporting counterparty;
        (B) The internal transaction identifier used by the automated systems of the reporting counterparty to identify the swap; and
        (C) The internal master agreement identifier (if any) used by the automated systems of the reporting counterparty to identify the master agreement governing the swap.

(2) Additional records required to be kept if possessed by a counterparty. In addition to the minimum records required pursuant to paragraph (a)(1) of this part, a counterparty that is in possession at any time on or after April 25, 2011 of any of the following documentation shall keep copies thereof:
(i) Any master agreement governing the swap, and any modification or amendment thereof.
(ii) Any credit support agreement or equivalent documentation relating to the swap, and any modification or amendment thereof."

MINIMUM PRIMARY ECONOMIC TERMS DATA FOR PRE-ENACTMENT AND TRANSITION SWAPS

COMMODITY SWAPS	Description
Contract Type	E.g., swap, swaption, forwards, options, basis swap, index swap, basket swap, other
Swap Transaction Date	Date when swap was entered
Quantity	The unit of measure applicable for the quantity on the swap.
Start Date	Predetermined start date from which payments will be exchanged.
End-date	Predetermined end date from which payments will be exchanged.
Buyer pay index	The published price as paid by the buyer.
Seller pay index	The published price as paid by the seller.
Buyer	Party purchasing product, e.g. payer of the fixed price (for swaps), or payer of the floating price (for put swaption), or payer of the fixed price (for call swaption).
Seller	Party offering product, e.g. payer of the floating price (for swaps), payer of the fixed price (for put swaption), or payer of the floating price (for call swaption).
Price	E.g., fixed price, the heat rate value, etc.
Price Unit	The unit of measure applicable for the price on the transaction.
Grade	E.g., the grade of oil or refined product being delivered.
Other Economic Terms	Any other primary economic term(s) of the swap matched by the counterparties in verifying the swap.

CREDIT SWAPS AND EQUITY SWAPS	Description
Buyer	Unique Identifier
Buyer SD	Is buyer a swap dealer?
Buyer MSP	Is buyer a major swap participant?
Seller	Unique Identifier
Seller SD	Is seller a swap dealer?
Seller MSP	Is seller a major swap participant?
Reference Entity	Subject of protection being purchased or sold
Transaction Date (CUT)	Date and time of trade in Coordinated Universal Time
Execution Venue
Effective Date
Expiration Date
Price	Strike, initial price, spread, etc.
Notional Amount	Amount
Notional Currency	Currency
Notional Amount in USD	Amount in USD
Up-Front Payment	Payment
Up-Front Currency	Currency
Payment Streams	Coupon, etc.
Master Agreement	Annex, credit agreement, etc.
Master Agreement Date	Date
Master Agreement Negotiated	Indication transaction did not involve an opportunity to negotiate a material term
Data Elements	Data elements necessary for a person to determine the market value
Cleared	Swap cleared by a derivatives clearing organization?
Clearing Organization	Name of derivatives clearing organization
Non-cleared Settlement Terms	Cash or Phsically Settled
Non-cleared valuation method	Valuation method
Non-cleared other	Other terms for determining settlement value
Other Economic Terms	Any other primary economic term(s) of the swap matched by the counterparties in verifying the swap.

CURRENCY SWAPS	Description
Contract Type	E.g., swap, swaption, forwards, options, basis swap, index swap, basket swap, other
Swap Transaction Date	Date when swap was entered
Currency 1	International Organization for Standardization Code.
Currency 2	International Organization for Standardization Code.
Notional Amount 1	For currency 1
Notional Amount 2	For currency 2
Settlement agenet of the reporting counterparty	ID of the settlement agent
Settlement agent of the non-reporting counterparty	ID of the settlement agent
Settlement currencty	If applicable
Exchange rate 1	At the moment of the trade/agreement
Exchange rate 2	At the moment of the trade/agreement
Swap Delivery type	Cash or physical
Expiration Date	Expiration date of the contract
Other Economic Terms	Any other primary economic term(s) of the swap matched by the counterparties in verifying the swap.

INTEREST RATE SWAPS	Description
Contract type	E.g., swap, swaption, forwards, options, basis swap, index swap, basket swap, other
Swap transaction date	Date when swap was entered
Swap effective Date	Effective date of the contract
Swap end-date	Expiration date of the contract
Notional currency one	International Organization for Standardization Code.
Notional currency two	International Organization for Standardization Code.
Notional amount one	The current active notional in local currency
Notional amount two	The second notional amount (e.g., receiver leg)
Payer (fixed rate)	Is the reporting party a fixed rate payer? Yes/No/Not applicable.
Fixed leg payment frequency	How often will the payments on fixed leg be made.
Direction	For swaps—if the principal is paying or receiving the fixed rate. For float-to-float and fixed-to-fixed swaps, it is unspecified. For non-swap instruments and swaptions, the instrument that was bought or sold.
Option type	E.g., put, call, straddle.
Fixed rate
Fixed rate day count fraction
Floating rate payment frequency
Floating rate reset frequency
Floating rate index name/rate period
Leg 1	If two floating legs, report what is paid.
Leg 2	If two floating legs, report what is received.
Other Economic Terms	Any other primary economic term(s) of the swap matched by the counterparties in verifying the swap.