Buy Side Feels Dodd-Frank Documentation Pressure

Terry Flanagan

With the shift to central clearing and straight-through processing of OTC derivatives, brought on by new regulations on both sides of the Atlantic such as Dodd-Frank and Emir, paper-laden processes associated with OTC documentation are being streamlined and automated.

On December 13, the U.S. Commodity Futures Trading Commission issued a mandatory clearing determination for certain interest rate and credit default swaps.

Beginning on March 11, swaps covered by the CFTC determination between swap dealers and major swap participants must be submitted for clearing, and buy-side market participants transacting swaps must determine whether they are subject to the mandatory clearing requirement.

As part of the clearing requirements, swap dealers and their trading counterparties must establish swap trading relationship documentation before any trade is executed.

“Relationship documentation now has to be executed pre-trade,” said Kevin Thorogood, global head of capital markets at Thunderhead.com, which automates trade documentation. “Instead of trade documentation being confined to the back office, where it traditionally resided, we are seeing a lot of activity in the front and middle office with regards to negotiating master documents and understanding terms and conditions.”

Automation of the document generation, negotiation and execution processes are seen as vital to increasing efficiency and control, as is the provision to lawyers and document negotiators of powerful clause library tools.

The relationship documentation required by the CFTC includes International Swaps and Derivatives Association (Isda) master agreements, swap confirmations and credit support annexes.

An underlying theme continues to be the ‘futurization’ of swaps markets, whereby financial instruments that had been negated and cleared privately will now be done so via exchanges.

“We can’t have all of the same rules for futures and swaps,” said CFTC commissioner Bart Chilton at a recent roundtable held by the agency. “They are different. That said, to the extent we can have a more harmonious regulation of futures and swaps, that’s a good thing in my judgment and will help fuel-inject a thriving, transparent and appropriately regulated futures and swaps markets.”

Firms have introduced systems coupled with workflow processes that aid metrics and reporting, and drive consistency across documentation.

Thunderhead has created a real-time community collaboration platform to streamline the negotiation of contracts and agreements.

Called One for Capital Markets, the cloud-based platform automates trade and relationship documentation processing, and all paper transactions throughout the trading lifecycle and across all asset classes and product types.

“Instead of requiring extensive manual input, documents are created from fully compliant templates which are then shared, reviewed and approved online,” said Thorogood at Thunderhead.com.

Trade body Isda’s Dodd-Frank documentation initiative provides a standard set of amendments, in the form of protocols, to facilitate updating of existing swap relationship documentation for Dodd-Frank compliance.

The first such protocol, formally titled Isda August 2012 DF Protocol, allows swap market participants to simultaneously amend multiple Isda master agreements.

The protocol consists of a series of amendments to existing documentation, as well as standardized questionnaires that must be completed by counterparties to satisfy new regulations. These questionnaires must be delivered to each relevant counterparty for the amendments and compliance to be effective.

In a February 11 letter to market participants, Isda recommended that buy-side market participants communicate with their relevant counterparties about whether they are subject to the clearing requirement no later than March 11.

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