Commodity Management Blog

Innovative Ideas and Thought Leadership for Volatile Commodity Marketplace

Dan ReidOn 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.