Swaps Industry Vexed by Trade Reconstruction Requirements

Terry Flanagan

Trade reconstruction requirements mandated by the Commodity Futures Trading Commission are having an impact on swap dealers and major swap participants.

The requirements stem from the Dodd-Frank Act and are implemented in rules adopted by the CFTC, in particular CFTC 1.35(a), which requires firms to produce a time-sequenced reconstruction of a swap, from the initial pre-trade communications through to the expiration of the swap, within 72 hours of a CFTC request. In order to do this, firms need to maintain daily trading records of swaps and all related records including communications, such as e-mail, instant messages, and recorded phone calls. Voice data represents a particularly difficult challenge.

Tagging, organizing, managing and exporting data through the lifecycle of a swap trade—from pre-trade, through execution to post-trade—is an arduous process because so many different types of structured and unstructured data are involved.

“The pre-trade workflow is typically unstructured. It might be a phone conversation, a chat on Bloomberg or other messaging system, an e-mail, etc.,” Harald Collett, global business manager for Bloomberg Vault, told Markets Media. “One of the hardest things is when you don’t have a trade identifier to correlate information to a particular trade or a particular counterparty. The requirement is to correlate communications to a legal entity identifier for a counterparty, which is a real challenge for the industry.”

The requirements from the CFTC have been a hot topic among compliance executives. Bloomberg recently convened a group of senior compliance executives from swap dealers for a half-day roundtable and conducted an informal survey of their level of readiness and the main challenges associated with trade reconstruction. Only seven percent said they were ready to meet the CFTC requirements today.

“Trade reconstruction requirements have created a broad industry record-keeping challenge that has not yet been tested, leaving industry participants to guess how the requirement will be enforced,” said Collett. “Recreating the entire lifecycle of a swap along with the data requirements of the regulation is a daunting proposition for most firms.”

The survey found that 100 percent of participants considered pre-trade to be the hardest part of the trading workflow for trade reconstruction purposes. Seventy-nine percent said that technology and system integration processes underlying trade reconstruction was the biggest challenge they face with the new mandates.

On April 3, the CFTC held a public roundtable to discuss Dodd-Frank end-user issues, which included a discussion of continuing concerns on the part of asset managers with respect to Regulation 1.35 compliance. In an April 17 comment letter, Sifma said that the costs to comply with the written and oral recordkeeping requirements significantly outweigh the benefits. Sifma requested postponement of the compliance date until December 31, 2014, which was granted by the CFTC.

To help firms meet the challenge of building and refining their trade reconstruction processes, Bloomberg Vault is developing a workflow map of a swap trade, as well as a whitepaper to help compliance professionals better understand the CFTC’s trade reconstruction requirements.

“We have clients today that are feeding their voice records into Bloomberg Vault so they can correlate their phone calls with their e-mails, IMs, trade documentation and trades,” said Collett. “We are working with the industry to respond to the requirements.”

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