Derivatives Users Scramble As Dodd-Frank Deadlines Loom

Terry Flanagan

A trio of compliance deadlines with the Dodd-Frank Act are looming, causing angst among market participants and regulators alike.

This Friday, new swap dealer regulations go into effect, requiring that entities that have more than the ‘de minimis’ level of dealing must register by no later than two months after the end of the month in which they surpass the de minimis level, according to an FAQ published by the Commodity Futures Trading Commission, the U.S. regulator.

Friday is also the deadline for reporting of swaps transactions to centralized swaps data repositories (SDRs).

Yet a third deadline that had been scheduled for Friday—regarding swap dealer position limits—has been stayed by a federal judge as a result of a lawsuit filed by industry participants.

And on Monday, October 15, the deadline for the CFTC’s external business conduct rules kick in.

Together, the deadlines present a host of operational and compliance issues for the derivatives industry.

“Compliance with regulations is happening, but at what cost?” said Zohar Hod, global head of sales and support at SuperDerivatives, a U.S. options pricing specialist. “The cost of complying with these regulations could add up to hundreds of billions [of dollars]. The total figure is yet to be determined as the final rules are still unclear.”

The swap dealer registration rule establishes triggers for registration dates based on thresholds. For example, if an entity reaches $8 billion in swap dealing the day after October 12, then the entity would have to register within two months after the end of October, which would be December 31.

A firm that registers as a swap dealer or major swap participant on October 12 will have to begin reporting swaps data on that date, and will also need to comply with Monday’s deadline for the external business conduct rules.

The Depository Trust & Clearing Corporation, the post-trade group, has received approval from the CFTC to create and operate a multi-asset class SDR in the U.S.

The SDR, which will be operated by DTCC Data Repository (U.S.), or DDR, will be fully operational on Friday, the first day of required swap data reporting by swap dealers and major swap participants (MSPs) for interest rate and credit swaps.

Reporting for equity, FX and other swaps by swap dealers and MSPs must begin no later than January 10, 2013, and data reporting for swaps between all types of counterparties will begin on April 10, 2013.

The reporting requirements call for extensive detail and timely reporting and are relatively complex.

“The changes in OTC derivatives regulation require changes in operation processes that will take some effort to implement,” said Brian Sentance, chief executive at Xenomorph, a provider of analytics and data management software.

“The need to move to more real-time management of data and operations requires a further change in architecture and processes, particularly as real-time, or velocity, meets the custom data requirements of OTCs, or variety,” he said.

Regulators are also concerned about overly burdensome requirements.

“The confluence of effective dates and the nature and timing of requests for clarification or relief has put us in a unique situation,” said CFTC commissioner Bart Chilton in a statement issued last week. “I’m concerned that without some palliative measures at this point, there could be potential harm to markets and ultimately to consumers.”

Noting that many market participants have requested clarification on the rules, Chilton said: “It’s time to calm the water a bit regarding immediately pressing deadline dates.”

The CFTC’s external business conduct rules, which have an October 15 compliance date, impose new obligations on swap dealers in a range of areas, focusing on enhanced customer protection.

Swap dealers must sign amendments to their ISDA documentation with impacted swap counterparties to become compliant with these Dodd-Frank rules.

Major dealers may have in excess of 10,000 counterparties with whom they have signed master agreements, and many end-users may be counterparties with multiple dealers. This creates significant levels of legal and administrative complexity and the potential for duplication of efforts as firms attempt to comply with the new rules.

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