Officially, companies are supposed to be sending trades over to a “Trade Repository” or TR by January 2014.  We are considering taking spread bets.

Here’s what we learned from Dodd Frank in the US:

TR submission is inextricably linked to the Electronic Confirm Process.  If you have to report OTC trades staying with a manual confirm process is a ticket to pain.  Plan for some re-design work around how OTC trades are confirmed and submitted.

Like Dodd Frank there are a pile of TR “contenders.”   Most likely won’t make it.  Why?  Well, like the US, there is operational efficiency in a confirmation + TR reporting.  Likewise, there is just not market (read money) mass for 9 TRs.

Firms should have a decent amount of skepticism around “easy” when it comes to both initial reporting on ongoing changes.  Take a look at Commissioner O’Malia’s comments here under the section “Attacking the Data Dilemma”.  Essentially he articulates that data non-standardization is the Achilles heel of trade reporting.  Many in the US selected an SDR that was easy to report to because the SDR did not standardize values.  We see this as mortgaging the workload.  If you picked an SDR that does a poor job of standardization you are just going to overhaul everything when they are forced to standardize.

What we think is going to be different under EMIR is that it is firms will likely report to multiple SDRs.  The product coverage under EMIR and REMIT is very wide and the ability for TRs to accommodate every single possible trade permutation is doubtful.  But here’s who we think are the major contenders.

EFET > DTCC COMBO: EFET already has a lot of confirm volume in Europe.  But, we are not expecting a target TR test environment to EFET until August.  This leaves 4 sweet months to meet compliance.  Somewhat doubtful that EFET will be able to incorporate FX deals into the commodity mix.  So it could be that firms may have to send some trades to EFET and FX trades over to DTCC directly.

ICE ECONFIRM > TRADE VAULT:  The feedback from participants in the US have been happier with the ICE/Trade Vault Combo than any other SDR.  Part of this could be because many firms were already somewhat familiar with the eConfirm process. But also the platform was more stable and ICE employees more familiar with complex commodity trades.  (I’m not suggesting there were no challenges…there were.  But they were far lower than other SDRs).   We are expecting ICE to expand its product footprint for EMIR to at least include FX trades.  This is a big plus.  Likewise we are expecting them to get fully underway and ready for TR connectivity by late July.

CME: A bit of a dark horse in the US.  CME was a little late to the game and under-marketed.  This is a mistake we don’t expect them to make twice.  Not only is CME a TR in and of itself, but they can also route submitted trades to DTCC.  Furthermore, product coverage is large out of the box.  There is also some natural advantage the futures exchanges have over others.  EMIR has a much wider reporting footprint than Dodd Frank.  So if your company is doing a significant volume on ICE or CME then it is likely that they can facilitate reporting of these products.

OTHERS:  I am not suggesting that others won’t show for TR reporting.  But our current read is that if they show for EMIR they will be loss leaders.

Our final bet.  When is EMIR going to go “Live?”   Mid Q1 2013.  We think that betting on anything later is overly optimistic.

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.

Well, kinda…see, there are hundreds of tools out there ‘extracting’, ‘transforming’ and ‘loading’ data.  But the term ‘ETL’ has generally meant something way way bigger.

ETL tools are typically gigantic, expensive and proprietary frameworks with tons of bells and whistles meant for developers.

For many firms that just want to consolidate data across systems or move data between a few systems, biting off a giant ETL tool is the technology equivalent of using a chainsaw to slice your bread.  

It’s going to make a mess.

We took a different approach.  After struggling with ETL tools for years we came to recognize that the ETL juggular is that it’s nearly impossible to keep the big ‘ol ETLs current with the business requirements.

Enter K3 where developers build the interfaces but then business users manage the logic of how the interface should transform the data.  Not the developers.  So while I love hearing clients tell me our software is the easiest way to extract, transform and load their data, I always feel a like someone just called our light, agile precision tool a giant chainsaw.

A bit naughty as it may be this is really important stuff.  Why?  Disruption is happening here.  Technology-wise we have seen this again and again.  And, the No SQL technology, although somewhat slow moving, is a whopper which has a very high probability of changing the status quo.

To me it looks like this:

Data Integration: System to System
MDM: Master Data Management
ETL: Extract, Transform, Load
B.I.: Business Intelligence “a-la Cube”

The United States of Data Applications is our neighborhood.   Most vendors in the space play seriously in some and dabble in others.  There’s always a lot of confusion about what K3 does versus Informatica  versus Mule, Versus Biz Talk, etc etc.  Widely differing approaches here…that’s another blog post.

The challenge is this disruption is coming straight to the United States of Data Applications.  It is still uncertain where the No SQL hurricane will hit.  Could curve left…could curve right.  But when No SQL starts taking shape from a platform to solutions…it’s going to be a different world.

For the last year or so we have been very active connecting deploying K3 to connect some of the world’s largest trading organizations to US Swaps Data Repositories.  What we noticed is that many times deals are captured in Excel spreadsheets and operations need a way to quickly and easily drop their trades into the SDR and eConfirm Service.

We have now gone live with several deployments of MxR.   With MxR you simply drop an Excel sheet into a folder and viola, it is automatically shipped into the SDR of your choice.  Whether you are standardizing on Trade Vault, DTCC, CME or any combination thereof, getting trades to the SDR has never been more simple.

What do you need to run MxR?  Technically nothing.   MxR runs on the Amazon Cloud (AWS) with full encryption.  Alternatively, one can run MxR internally behind your firewall.  Even if you have a built out solution for Dodd Frank, this is a great backstop.  Likewise, MxR’s user interface for configuring mapping and rules allows users to simply produce a minimal spreadsheet instead of one with hundreds of columns.

Email Andrew Byrnes if you would like to find out more.

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.

Biggest news is that CME got their SDR approved.   This was a bit of a surprise to us as we thought that the CME lawsuit was a “tell” that they were just not ready to go.  I’m big enough to admit when we are wrong.  And we were.   So, CME gets approval. But CME has  fallen so far behind ICE it’s a catch up game now.  So, what’s CME got up its sleeve?  Free that’s what.  LINK  We’re testing our connection to the CME SDR this week.

The other interesting news is that we have a couple drop outs.   Very surprised to see that DTCC GTR for commodities has withdrawn their application.   Effectively GTR is dead.  Instead, DTCC is going to fold its commodities operations into the primary DTCC SDR.  It’s not quite clear what DTCC will have to do to get commodities approved on its primary SDR but the short of the story is that if you interfaced to GTR…it’s dead now.  Turns out that the artist formerly known as GTR is being folded into the DDR (which is approved).

In other news, Reval dropped out as well.  One can only speculate.  But at the end of the day ICE Trade Vault has won the vast majority of the market.

Here’s the current status: http://sirt.cftc.gov/sirt/sirt.aspx?Topic=DataRepositories

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

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

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.