Your End-User Dodd-Frank Checklist

Posted on March 25, 2013 by Gordon Allott

Sharing information is important. If you have any questions about any of these, don’t hesitate to email me.

In Texas it’s illegal to graffiti someone’s cow. Seriously, you can’t make this stuff up. So at some point someone in Texas took branding a bit too far. And a legislature got into a knot and viola we have a law.

Speaking of fun laws, Dodd-Frank is upon us. Here is a rundown to go live:

End User Requirements BY APRIL 10th:

Get Your CICI! (The precursor to a Legal Entity Identifier (LEI)).

You’ve got to register. Every party to a OTC financial transaction MUST register by April 10th. It’s easy. Get it done! The CFTC may not be able to make heads or tails of trade submission (see below). But they will be able to tell if a company has properly registered. See the registration link here: www.ciciutility.org

Load All Historic Financial Deals into an SDR

If you are a party to any financial transaction in energy or commodity open as of July 21, 2010 to April 10th, you need to load EVERY historical deal into a Swaps Data Repository.

Yes, your counterparty may do this for you. (Such as if you were dealing with a bank) But you need to make sure they either did it or intend to do it by April 10th. The proof positive is by getting the USI (Universal Swap Identifier) from your counter-party .

Embedded Options are Reportable. So say you did a physical fixed price deal. But let’s further say the deal had some swing optionality. The physical fixed part of the deal is not reportable…but the swing? Yep, that’s reportable. It can get dicey here because sometimes your counterparty may disagree as to whether an embedded deal is reportable. It’s worth spending some time examining contracts and determining whether there is any embedded optionality and reaching out to your counterparty.

Don’t Assume That the Exchange Will Send Historical Trades to the SDR for You.

Although exchanges are required to report deals as of April 10^th, DO NOT assume that they will send over your historical financial deals. This is particularly true if they were “facilitated” OTC deals. It is a mistake to assume that your cleared and un-cleared “exchange facilitated deals” will be sent to an SDR.

EOD Reporting

On April 10th you’ve got to make sure that every new fin deal is reported to an SDR by end of day. Are all your counterparties doing the reporting? Yes? Great! Don’t forget your Part 45 obligations around recordkeeping. Yes, even if you do not do the reporting there is a lot of mandatory requirements around how you keep these deals in house.

Let’s say you are a oil and gas producer. To hedge production you entered into a 3 way collar. Is this reportable? You bet. Odds are that a swaps dealer is your counterparty. Just know that these are subject to “in house” inspections and they need to be complete.

Be Prepared for it all to Change

So Interest Rate and FX has been reporting since January. How has it gone? Terrible! While most banks and market participants sent these trades have been sent over to the DTCC SDR and a handful over to ICE Trade Vault, the start of the Dodd-Frank market turned out to be a near total missed approach. The data sent over to the SDR’s was so incomprehensible, that the CFTC admitted they couldn’t find the London whale even if they wanted to. See this article.

Gensler’s comments in this doc highlight the CFTC lack of resources being part of the problem.

The net result of this is all that work you have done so far is going to change. The CFTC will certainly be rolling out new requirements on how products are reported. Be prepared.

ICE E-Confirm

I don’t mean to shamelessly plug ICE. But if you are not using eConfirm you are in for a world of pain. I don’t mean to suggest that you have to use Trade Vault as your SDR. Let’s say you are the reporting counterparty and use DTCC as a SDR. Your counterparty needs to know that you reported the deal. Easily solved by sharing the USI. The EASIEST way to get USI on both sides of the trade is eConfirm. Rumor is that ICE has on-boarded hundreds of new users into eConfirm and it looks like the better part of the market is going to go there for confirmations.

The Year of the Snake…and Trade Break

Posted on January 15, 2013 by Gordon Allott

I’m not big on New Year resolutions or on predictions. But in the case of Dodd-Frank and EMIR in Europe it’s hard to resist. The die has been cast and SDRs are a real thing now.

Here Come the Trade Breaks

Setting aside for the moment the master strokes about what DF and EMIR are supposed to be about, let’s talk for a moment about the hands on, down in the trenches effect of what these rules are actually causing.

A trade clean up of epic proportion.

It sounds like a great and practical idea. Perhaps an idea that many firms agree have been put off too long. But there is a problem. A big one actually…this is the commodities business.

In the commodities business we have legacy systems. No I don’t mean just in-house built systems. I mean vendor systems that were architected in the 80′s and 90s. Lots of them out there, sold as new, patina upon patina, with the same fundamental architecture they started with. I was working with a vendor system at a client. One of our younger developers was pulling his hair out asking why, why did they do this?! The answer unfortunately is the same as the reasoning for popped collars and hair gel in the 80s. “It was the thing at the time.”

Immediately on everyone’s plate is how to get trades out of these old architectures and get them properly into the SDRs. This turns out to be, at best, like data gymnastics. At worst mad contortion. If the data is a spaghetti-works to begin with the probability of a trade break goes through the roof. Surveying the dozen or so systems we have connected to the SDRs better than 3/4 of those have a significant amount of transactions that have been “shoehorned” into the system. This is a recipe for a trade break downstream with ICE/DTCC/CME or whatever SDR has been chosen. These systems are somewhat unforgiving, and as a result unless they come across perfect they bounce.

Forget the Year of the Snake. This is the year of the Trade Break.

Trading 2013 | The Price is Right!

Posted on October 24, 2012 by Gordon Allott

Remember the 2007 price manipulation case? There was an interesting clash between price publishers, alleged manipulative traders, and the CFTC. It kind of turned into a debacle where rogue traders were allegedly submitting false prices to the price publishers. The CFTC in trying to police the manipulation dropped a subpoena on the publisher. Publisher pushed back claiming reporter’s privilege. Queue the lawyers and away we go.

Along comes Dodd Frank and the framework is setup to never, never run into this problem again.

In the new framework, ALL OTC financial trades are sent to a Swaps Data Repository. Maybe your counterparty will send over the details on your behalf. Maybe you send them yourself. But at the end of the day EVERY OTC financial position is going to be in there.

Under Dodd Frank, each SDR is mandated to publish prices of received trades. This is full public dissemination. Generally in the first year prices are publicly available anywhere between 1 and 4 hours of submission to the SDR. If you want real time prices (i.e pre-public reporting data), you are going to have to pay the SDR for access to its real time feed.

This is a nice summary by Gibson, Dunn & Crutcher.

What does this mean? Well, a couple things.

Companies should be looking at revising their Master Agreements. Obviously Dodd Frank requires some revisions on OTC trading anyway. But the prices coming from the SDR are likely to be the default price source for settling transactions.

If you do not have an approach for the capture of time series storage of prices, you could be in for a surprise come 2013. Prices are going to be coming off of the SDR at least hourly. It’s a fundamental risk principle that we are going to have to capture these. Some ETRMs do this better than others. Many leverage a price warehouse such as LIM (Morningstar) and ZEMA (ZE). Contacts below. But we’d really suggest that companies start planning how they are going to make the pricing transition in 2013.

Morningstar (LIM): Rafael Hines: Rafael.Hines@morningstar.com

ZE (ZEMA): Fran Rolon: Fran@ze.com

Dodd Frank | CFTC – Black Swan No Action

Posted on October 18, 2012 by Admin

The CFTC issued some breaks by laying out a series of Dodd Frank “No-Action” letters. The biggies:

CFTC issued a No-Action letter to prevent firms from crossing into Swaps Dealer status. The rule states that any firm doing more than $25 Million in business with “Special Entities” such as a Federal, State or Local utility is classified as a Swaps Dealer. The CFTC raised this level by 3200% to $800 Million. Yep. Black Swan. They really do exist.

We’ve already seen the problems that this rule had created. Liquidity for public utilities has evaporated because private utility XYZ and Merchant ABC don’t want to do business with them any more to prevent becoming a Swaps Dealer.

Transition from swaps to futures No-Action. As everyone is aware ICE rolled its swaps over to futures last weekend. Exactly when everyone (not a bank) is in the midst of sorting out whether they are Swaps Dealers or not. And, just when you think you have come up with your final number…poof… all your ICE trades are now futures and excluded from the calculation. Now under the No-Action letter everyone has until end of year to figure it out.

Yet to get No-Action status: Physical Transport and Storage. This is kind of a curve ball in my opinion. For example, is a natural gas transport contract a physical

What Am I !????

deal? Is it a physical deal with embedded optionality? Or is it just a financial deal? If it’s a physical deal then where are the molecules? If it’s a physical deal with embedded optionality, then what part is physical and what part is option? If it is a financial deal…well, I hate to be the bearer of bad news, but lots of companies represent the value of their transport as spreads or spread options.

I would argue this: It could be any of the above and a No-Action is appropriate to give the CFTC the time to figure it all out.

Here’s a link to the CFTC No-Action letters:

http://www.cftc.gov/LawRegulation/CFTCStaffLetters/No-ActionLetters/index.htm

ICE Has Officially Gone Back to the Future(s)

Posted on October 15, 2012 by Vivek Pathak

It’s a little known fact that any time there is a trade break at any of our clients using K3, I get an alert email. When we configure the email alerts I ask clients to put me on the distribution list for any trades received from the exchange in K3 but not able to book in the ETRM system. It just helps me supervise any troubleshooting and making sure any problems are headed off at the pass.

So with the changes on ICE, I was expecting a pretty busy morning. And then…..Nothing.

K3 Customers Made the Transition in a Couple of Hours

At the risk of bragging, I’m happy to say that K3 clients weren’t slaving away this weekend. Unlike approaches that use trade templates or hard-coded mappings, with K3 the update process was simple. Our clients made the update without changing any code, doing painful technology manual labor, requiring code freezes or distracting skilled developers from other projects.

They simply opened the K3 GUI and exported affected mappings to Excel. They then replaced affected values from the ICE spreadsheets and pasted the updated mappings back into K3. Done.

If anything was time consuming, it was getting into the ICE Test environment and booking deals to ensure all was flowing correctly. All in all, the process took a couple hours end-to-end and I’m proud to say that most of them did it without even having to ask for help.

Ok, I am bragging. But if anything it’s because I’m really proud of our people and how they work smart. I know a lot of folks spent their weekend (probably a lot of weekends) altering internal systems. And I’ve been there, but it just does not have to be that way.

Oh yeah, and some guy jumped from 128,000 feet this weekend. Wow.

Dodd-Frank | Court Torpedoes Position Limits

Posted on October 1, 2012 by Admin

CFTC sent back home to do its homework. The District Court tossed the position limits ruling. Don’t get me wrong. I really feel for the gauntlet that the CFTC has been put through in terms of getting out new rules. But the District Court found that the organic legislation did not give the CFTC the authority to establish limits without finding that the rule is “necessary and appropriate.” In other words, “Go back and do more homework.”

“U.S. District Judge Robert Wilkins in Washington today ruled that the 2010 Dodd-Frank Act is unclear as to whether the agency was ordered by Congress to cap the number of contracts a trader can have in oil, natural gas and other commodities without first assessing whether the rule was necessary and appropriate.”

More info available here.

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