Compliance Burdens OTC Markets

Terry Flanagan

In the more than four years since the Dodd-Frank Act was signed into law, most of the regulations implementing Title VII, dealing with OTC derivatives, have been promulgated by the U.S. Commodity Futures Trading Commission and the Securities and Exchange Commission. Market participants now face the tough business of complying with this web of regulation, according to Robert Pickel, former CEO of the International Swaps and Derivatives Association.

Pickel, a lawyer by background, knows the drill of poring through regulations and trying to understand them. “Actually translating that into an effective means to help people navigate what are very dense, very complex, and in some cases contradictory regulations, particularly when you layer on not just what’s happening in the United States but if you layer on what’s happening in Europe and elsewhere, is the greatest challenge,” Pickel told Markets Media.

Satya Pemmaraju, Droit Financial Technologies

Satya Pemmaraju, Droit Financial Technologies

Swaps market participants are currently experiencing three major pain points, according to Satya Pemmaraju, CEO and co-founder of Droit Financial Technologies: who to trade with, what to trade, and where to trade and clear.

“What we are asked by our clients is, ‘How are we compliant in our trading process pre-trade, and how can we demonstrate compliance post-trade to both internal management and external regulators?’,” Pemmaraju said. “The core of the pain points that they’re facing today is that they’re unable to do these things with any degree of automation, and are saddled with manual processes and weaknesses.”

Droit’s mission is to unify pre-trade front-office decision making for OTC derivatives with post-trade compliance reporting and exception reporting that regulators are keenly interested in.

“We’ve made a lot of progress in putting together a common infrastructure, common data, and common logic that can drive both these functions within an institution,” said Pemmaraju. “Clearly it ties in very well with the regulatory world that derivatives participants face. How do we approach that in a systematic, robust fashion taking into account complexities across jurisdictions? These issues cannot be dealt with manually any longer.”

Pickel said he was “intrigued with the product that (Droit) have to offer because it’s not just looking at the regulations, it’s not just technology, it’s a merger of regulation and technology in a very effective way.”

Under current CEO Scott O’Malia, a former CFTC commissioner, Isda is focusing on a common regulatory approach. “Globally we’re not there yet, but everybody understands the importance for this particular business of achieving a common approach,” said Pickel. “In the United States, the CFTC’s basically done with their rule-making process and now the industry is focusing more on Europe.”

Pickel said that margin for uncleared swaps remains an outstanding issue, “particularly requirements for initial margin of all market participants, at least all financial market participants. I think that’s going to be a continuing focus within the industry and certainly for Isda.”

Isda’s recent rollout of credit-derivative definitions will put an emphasis on firms “making sure their systems are up-to-date not just with the regulations but with market practice,” said Pickel. “So as Isda rolls out new definitions as it did in September, Droit worked to update their system to make sure that when people utilize the Droit system they’ve got the most up-to-date information available to them.”

Featured image by dimakarlov/Dollar Photo Club

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