9/21/17 - Regulatory Focus on Swap Dealer Reporting
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9/21/17 - Regulatory Focus on Swap Dealer Reporting

Non-U.S. swap dealers will soon have to pull back the curtain on home-office operations. The National Futures Association — to which the Commodity Futures Trading Commission delegated registration and examination authority over swap dealers — recently sent letters to non-U.S. swap dealers inquiring about the locations of their business operations. While the NFA will tailor its examinations to the operations of each swap dealer, it will likely focus on common high-risk areas, with reporting at the top of the list given industrywide compliance issues and recent CFTC enforcement actions and fines. In preparation, firms have begun reviewing their reporting programs to identify and remediate key compliance obstacles before the NFA arrives.

In the past two years, the CFTC has fined seven firms a total of over $4 million for noncompliance with reporting regulations,1 including issues related to the failure to report counterparty legal entity identifiers, incorrect identification of a reporting party, incorrect data formatting, the untimely collection and production of trade confirmations, inaccurate reporting of trade cancellations, and missing or incomplete reports. Some observers have predicted a general regulatory easing under the new administration. We believe, however, that the NFA and the CFTC will continue to enforce swap dealers’ compliance with their obligations under Title VII of the Dodd-Frank Act and, in particular, will closely scrutinize whether swap dealers are complying with applicable reporting regulations. Chairman J. Christopher Giancarlo recently reaffirmed his commitment to enforcement, stating, “There will be no pause, let up or reduction in our duty to enforce the law.”2

How Should Non-US Swap Dealers Prepare for Examination of Their Reporting Programs?

The CFTC and NFA understand that perfect compliance with reporting regulations is seldom, if ever, achieved. However, the CFTC and NFA have also stated that swap dealers and major swap participants are not reporting accurate and timely data as required and that they should evaluate their reporting practices.3 Examiners expect swap dealers to have a well-designed, controlled program. In practice, this means a swap dealer regularly tests the operational effectiveness of its program, understands its deficiencies, regularly assesses root causes, and has developed concrete remediation plans to establish a more robust program.

To the extent not already completed, we suggest that swap dealers take the following steps to enhance their reporting programs in anticipation of NFA examination:

  1. Understand Current State — Meet with functional owners and review documentation (including policies, procedures, audit reports, self-assessments, and metrics) to understand the state of the reporting program and any issues requiring remediation.
  2. Assess Design Effectiveness — Review the end-to-end reporting process flows and control points to assess whether the reporting program is well designed, with sufficient oversight.
  3. Assess Operating Effectiveness — Test a sample of swaps-reporting data to assess whether the reporting program operates as designed and allows for timely, accurate, and complete reporting.
  4. Prioritize Remediation Efforts — Prioritize remediation efforts based on risk exposure, and raise the level of the reporting program to match or exceed industry standards.

These steps, while comprehensive if fully implemented, need not take long to execute. Swap dealers that rely on common systems for reporting in the U.S. and EU may gain valuable insight regarding program limitations and weaknesses through conversations with staff dedicated to implementing the revised Markets in Financial Instruments Directive and ongoing compliance with the European Market Infrastructure Regulation.

Regardless of the approach taken, swap dealers should be ready to answer the following key questions prior to examination:

  • How does data flow from the front-office systems to a central reporting system to a swap data repository?
  • What controls, including data reconciliations, ensure that the process is working as intended?
  • What metrics are available to track the timeliness, accuracy, and completeness of reporting?
  • Which individual, group, or function is responsible for overseeing the reporting program?
  • What are the key operational, system, and compliance issues? Do the issues that resulted in CFTC fines at other firms exist at your firm?
  • How are issues tracked and prioritized? Do remediation plans include clear ownership and timelines for specific tasks?
  • Do procedures accurately and appropriately document processes and controls?

Conclusion

The prospect of examinations is an additional compliance concern for non-U.S. swap dealers, many of which already face significant resource constraints with MiFID II set to come into force on Jan. 3, 2018. As MiFID II efforts will likely continue into at least the first half of 2018, swap dealers may have difficulty allocating resources and management attention to their reporting programs.

Despite these competing demands, we advise our clients to proactively assess their reporting programs, and their swap dealer compliance programs generally, ahead of NFA examination. While each swap dealer can expect to receive feedback from the NFA following an exam, a firm that understands and remediates its deficiencies should be well positioned to avoid any serious consequences.

How Promontory Can Help

Promontory has significant experience advising financial institutions on compliance with global regulations for capital markets. Doug Harris, former senior deputy comptroller for capital markets at the Office of the Comptroller of the Currency and current public director at the NFA, and Munib Ali, former chief compliance officer of Santander’s swap dealer in the U.K., lead our swap dealer team. We have advised firms on all matters related to swap dealer compliance, including registration and the design, implementation, and testing of compliance programs.

Contact Us

Doug Harris
Managing Director
dharris@promontory.com
+1 212 365 6568

Munib Ali
Managing Director
mali@promontory.com
+44 207 997 3427


This article was updated after initial publication to include a relevant Sept. 25, 2017 CFTC enforcement action. 

FOOTNOTES

1. Swap-reporting regulations are codified in 17 CFR Part 20 (large trader reporting), Part 43 (real-time public reporting), Part 45 (swap data reporting), and Part 46 (historical reporting). This alert refers to these regulations collectively as “reporting regulations.”

2. J. Christopher Giancarlo, speech, International Futures Industry Conference (March 15, 2017). In addition, Giancarlo discussed the importance of reporting in his keynote address to the SEFCON conference on Jan. 18, 2017, stating that “of all the many mandates to emerge from the financial crisis, transparency into swaps counterparty exposure of major financial institutions was perhaps the most pressing.”

3.CFTC Staff Advisory No. 15-66,” CFTC (Dec. 17, 2015).