This webinar explains the many facets of Dodd-Frank rules and regulations and what companies, such as Producer companies, need to know now in order to be compliant. Our seasoned Compliance and Commodities experts describe exactly how the Dodd-Frank rules and rule changes affect Producer companies and what you can do now to mitigate these challenging risks:
--Producers’ Exposure to Dodd-Frank
--Clearing and End-User Exception
--Recordkeeping and Reporting
--Duties of SDs to Non-SD/MSPs – Counterparty Documentation
--Policies, Procedures, and Training
--Exchange Position Limits
--Achieving Compliance
3. Introduction to WG Consulting
The Risk, Systems & Compliance (RSC) service line of WG Consulting (WG) specializes in:
• Developing
• Implementing and
• Maintaining risk management solutions
WG Regulatory Compliance Consultants specialize in the:
• Mechanics of the underlying commercial trading and marketing activities
• Letter and intent of those external laws, rules and regulations that govern these
activities
• Information systems and processes required to support a Regulatory Compliance
Program
• Development and implementation of a systematic approach to Compliance
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4. Definition of a Swap
• Commodity swaps and commodity options, whether or not physically settled, are
subject to regulation under Dodd-Frank, subject to certain Exclusions and Exemptions
• Exclusions exist for any sale of a nonfinancial commodity for deferred shipment or
delivery, so long as the transaction is intended to be physically delivered (the Forward
Contract Exclusion)
• Commodity Trade Options are still deemed a swap, but are exempt from some of the
Dodd-Frank swap regulations
• In order to determine whether a transaction is a swap, excluded from the definition of
a swap, or exempt from some of the rules regulating swaps, the CFTC will examine the
facts and circumstances of each transaction
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5. Producers’ Exposure to Dodd-Frank Rules
Hedging Production can actually create exposure to:
•
Mandatory Clearing of Swaps
•
Reporting and Recordkeeping
•
Counterparty Documentation (ISDA Protocols)
•
Anti-Manipulation
•
Margining and Capital
•
Exchange Position Limits
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6. Mandatory Clearing of Swaps
• Mandated central clearing for all swaps
• As of August 2012 the CFTC declared following swap types as required to be cleared:
• Interest Rate Swaps
• Credit Default Swaps
• Compliance Dates to note:
• Interest Rate and Credit Default Swaps: September 9, 2013
• Other Commodity Swaps: TBD
• Non-SD/MSPs may elect the End-user Exception if the swaps are eligible
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7. End User Exception To Clearing
•
•
•
•
Clearing requirements do not apply if one counterparty applies for the End-User
Exception to Clearing and
• Is not a Financial Entity
• Is using swaps to hedge or mitigate commercial risk
• Notifies the Commission, in a manner set forth by the Commission, how it
generally meets its financial obligations associated with entering into noncleared swaps
A party’s ability to elect the end-user exception is a function of the purpose of the
particular swap in question
Not limited to physical position hedging
Use of the exception by non-financial entities for financial risk-hedging must be an
incidental part (i.e. not central to) of the Electing Counterparty’s business
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8. Part 43 Real Time Reporting
Part 43 establishes the requirements for real time dissemination to the public of all swap
transaction and pricing data, including those swaps executed on or pursuant to the rules
of a Swap Execution Facility (SEF) or Designated Contract Market (DCM) and those
executed bilaterally, off-facility between counterparties.
Part 43 applies to all transactions considered as “Swaps”; including:
• Swaps subject to the mandatory clearing requirement
• Swaps that are not subject to the mandatory clearing requirement, but are cleared at
a registered derivatives clearing organization (DCO)
• Swaps that are not cleared at a registered DCO and are reported to a registered swap
data repository (SDR) that accepts and publicly disseminates swap transaction and
pricing data in real-time
• Any executed swap that is an arm’s-length transaction between two parties that
results in a corresponding change in the market risk position between the two parties
• Any termination, assignment, novation, exchange, transfer, amendment, conveyance,
or extinguishing of rights or obligations of a swap that changes the pricing of the swap
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9. Part 43 Real Time Reporting
Out of Scope Transactions include:
• Internal swaps between one hundred percent owned subsidiaries of the same parent
entity
• Swaps between Exempt Entities
• Portfolio compression exercises
Part 43 applies to all parties to a swap including swap dealers, major swap participants
and U.S.-based market participants (non-Swap Dealers / non-Major Swap Participants).
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10. Part 45 Swap Data Reporting
Part 45 establishes the requirements for reporting swap confirmation, continuation, and
valuation data to a SDR, including those swaps executed bilaterally, off-facility between
counterparties.
• Reporting party must report all confirmation, continuation, and valuation data for the
swap to a SDR
• Confirmation data includes all Primary Economic Terms (PET) to a swap and must be
reported to a SDR “as soon as technologically practicable”
• Continuation data includes any changes to the PET to a swap and generally must be
reported the day the change happens throughout the life of the swap
• Valuation data is the current daily mark of the swap as of the last day of each fiscal
quarter and must be reported to a SDR within 30 calendar days of the end of each
fiscal quarter
Part 45 applies to all parties to a swap including swap dealers, major swap participants,
U.S. and Non-US based market participants (non-Swap Dealers / non-Major Swap
Participants).
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11. Part 45 Swap Data Recordkeeping
Part 45 implements rules relating to the swap data recordkeeping and reporting of certain
economic terms to a swap transaction to ensure swap data is current and readily available
to Regulators to carry out their market monitoring and enforcement duties.
Recordkeeping Requirements
All non-SD/MSP counterparties subject to the jurisdiction of the Commission shall keep
full, complete, and systematic records, together with all pertinent data and memoranda,
with respect to each swap in which they are a counterparty, including, without limitation,
all records demonstrating that they are entitled, with respect to any swap, to elect the
clearing requirement exception.
Record Retrieval
Records required to be kept by Non-SD/MSP swap counterparties shall be retrievable by
that counterparty within five business days throughout the period during which it is
required to be kept.
Records required to be kept by non-SD/MSP counterparties may be kept in either
electronic or paper form, so long as they are retrievable, and information in them is
reportable.
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12. Part 46 Historical Swap Reporting
Part 46 establishes the requirements for reporting and retaining certain information
regarding swap transactions entered into prior to the implementation of the Swap Data
SDR Reporting and Swap Data Recordkeeping rule.
Historical Reporting Requirements
• Reporting of swaps executed before July 21, 2010 and remain open as of July 21, 2010
• Reporting of swaps executed on or after July 21, 2010 and before April 10, 2013
• These records must be reported In the format required by the Commission, just as in the
Part 45 Swap Data Reporting rule
• Same general information is required to be reported as in the Part 45 Swap Data
Reporting rule
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13. External Business Conduct Standards
The ISDA August 2012 DF Protocol (in effect as of May 1, 2013) addresses:
• Confirmation of Counterparty Eligibility (ECP)
• Documentation of Counterparty’s Status and Business Purpose
• Counterparty Acknowledgement of Qualified Personnel
The ISDA March 2013 DF Protocol (in effect on of July 1, 2013) addresses:
• Agreement on handling of Confirmations, Clearing
• General Method and Agreement of Entering into Portfolio Reconciliation
• Documentation on Non-SD/MSP requirements when electing End-User Exception to
Clearing
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14. Policies, Procedures, and Training
A robust Risk Management Program contains:
• Identification of risks and risk tolerance limits
• Procedures for detecting risk limit violations
• Actions to mitigate specific risks,
• Periodic Risk Exposure Reports highlighting your risk exposure
• Monitoring of compliance with the Risk Management
• Distribution of risk management policies and procedures to applicable supervisors
• Recordkeeping, including retaining copies of all written approvals required under the
Risk Management Program
• An annual review and testing of the Risk Management Program policies and
procedures
Training
Due to the complex and highly prescriptive nature of the Dodd-Frank rules and
regulations, it is good practice to provide training to your Trading and Compliance
personnel in order to ensure the relevant personnel within your organization have
sufficient knowledge of the applicable rules and how they affect their day-to-day
operation.
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15. Exchange Position Limits
Written policies and procedures should be established to represent how you monitor
compliance with Exchange Position Limits:
• Diligent monitoring to ensure compliance with Exchange Position Limits
• Implementation of an early warning system to flag positions in danger of breaching
the limits
• Development of a process for promptly notifying Governing Body and the CFTC when a
position limit is violated
• Quarterly testing of Position Limit Procedures for effectiveness
• Annual training should be held on applicable position limits
• A process for retaining documentation of the implementation of the Position Limit
Procedures, including:
• Training records
• Early warning notifications
• Quarterly testing and annual audit written reports
• Changes to the Position Limit Procedures.
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16. Dodd-Frank Compliance Monitoring
Exchange Position Limits (Intraday)
• With ICE and CME listing Swap products on their Futures Exchange platform,
organizations that previously only traded OTC products are now subject to exchange
position limits.
CFTC Position Limits (Intraday)
• CFTC Position Limits were vacated in September of 2012 but should return sometime
in 2013.
MSP Calculations (Frequency varies)
• There are a number of MSP tests and safe harbor calculations that are needed to
identify if your organization is an MSP.
Swap Dealer Notional (Monthly)
• Organizations will need to calculate their annual notional value to determine if they
are a Swap Dealer.
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17. Exchange Position Limits
WG Consulting has built an Exchange Position Limit tool that can monitor your
organization's position limits by commodity code, based on various data sources.
Thresholds:
1. Spot(Front) Month Limit*
2. Any Single Month Level
3. All Month Level
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Spot (Front) Month
Total and % of Limit
Any Single Month
Total and % of Limit
All Month Combined
Total and % of Limit
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18. MSP Calculations
WG Consulting has built an MSP Calculation tool that can perform the three MSP and Safe
Harbor tests on an as needed basis.
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19. Recordkeeping & Reconciliation
Recordkeeping
The goal is to retain full, complete, systematic records, together with related data and
memoranda with respect to each swap. WG has a simple, spreadsheet based solution
that allows you to seamlessly connect to the SDR or SDRs of your choice and download
your relevant trade data in the format consistent with Dodd Frank requirements.
• Quick to implement
• Connects seamlessly to SDR
• Single record with all required Dodd Frank data elements
• Easily exportable reports and Integrated audit log
Reconciliation
• Ability to validate that trades in your C/ETRM system match the data that is being
disseminated to the public through the various SDRs.
• Ability to validate that trades in your C/ETRM systems match the data that is being
reported on your behalf to a SDR when you are not the Reporting Party to a swap.
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20. Recordkeeping
WG Consulting has built an agile Recordkeeping tool to pull data from the Swap Data
Repositories (SDR) and transform the data to meet Part 45 Recordkeeping requirements.
Log: Provides audit transactional
information in addition to separate
Audit Log view
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Recordkeeping Data: Contains all the
reporting elements required for
recordkeeping
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21. Reconciliation
The complimenting Reconciliation tool will identify any discrepancies between your
internal ETRM system(s) and the multiple SDRs used by you and your counterparties. The
intelligent design allows users to “teach” the tool to improve performance.
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22. Dodd-Frank for Producers
Reporting Requirements
WG Compliance Reporting Solutions
• Reporting and Recordkeeping
• Quick & Easy to Implement
• Compatible with Microsoft Office
• Easy to read in a familiar Microsoft
Excel format
• Connects seamlessly to SDR
• Single record with all required Dodd
Frank data elements
• SDR Recordkeeping Reports
• SDR Reconciliation Reports
• MSP Calculations
• Exchange Position Limits
Procedures & Policies Requirements
• Counterparty Documentation (ISDA
Protocols)
• Mandatory Clearing of Swaps
• Anti-Manipulation
• Margining and Capital
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WG Solutions
• Assist in the completion of ISDA
protocols
• Assist in the rewrite completion of
company Policies
• Assist in company training sessions
• Ease of mind knowing your company is
compliant
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23. Financial Advisory Services
Financial Advisory
CFO Services
Financial & Operational
Reporting
Transaction
Advisory
Business Process & Controls
Process Improvement
Internal Controls
• SEC & IFRS
Reporting
• M&A Services (buy/sell
side)
• Sarbanes-Oxley
Compliance
• Private Equity Services
• External Audit
Preparation
• Business
Transformation
• Project Management
• Turnaround
Management
• Regulatory Reporting
• Capital Transaction
Services (equity & debt
raises)
• Technical Research
• Transaction Due Diligence
• Procure-to-Pay Process
• Controls Needs
Assessment & Program
Development
• Lender & Private Equity
Services
• Financial Reporting
Process
• Budgeting &
Forecasting
• Interim or Outsourced
Corporate Development
• Supply Chain /
Inventory Management
• Management Reporting
& Dashboards
• Valuation & Dispute
Resolution
• Demand Planning &
Forecasting
• Oil & Gas Reporting
• Restructuring Services
• Control Design &
Integration
• Interim CFO
• IPO Services
• Merger Integration
• Interim Controller / CAO
• Treasury Management
• Strategic Planning &
Analysis
• Federal & State Tax
• Quote-to-Cash Process
• Controls Risk
Assessment
• IT Controls
• Interim Personnel
• Controls Testing
• Fraud Investigations &
Forensics
• FCPA
• Change Management
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24. Risk, Systems & Compliance Services
Regulatory
Compliance &
Dodd Frank
Solutions
Trading and
Risk
Management
•
•
•
•
ETRM System
Selection &
Implementation
•
Strategy &
Operations for
Front, Middle &
Back Office
•
Supply, Trading &
Risk Management
•
•
Interim CRO
•
•
•
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Enterprise
Performance
Management
(EPM)
Business
Intelligence (BI)
All aspects of DF
CFTC Final Rules
Implementation
•
Data Discovery
•
Visualization Design
Policies,
Procedures,
Manual Drafting
•
Dashboard Design
and Implementation
•
Analytical
Application Design &
Development
Training
Compliance
Program Reviews
and Testing
Trade Monitoring
Service
Regulatory
Reporting and
Recordkeeping
Compliance
Function
Outsourcing/
Interim CCO
•
•
Project
Management
•
Application
functionality
enhancement
and end user
training
•
Self-Discovery &
Analytics Training
•
Workflow Control
•
Areas of Expertise:
TIBCO Spotfire,
Oracle BIEE, SAP
BusinessObjects
•
Reporting
Strategy, Process
Review and
Optimization
Enterprise
Architecture
Strategy and
Roadmap
•
Interim and
Outsourced
Managed Services
•
Application
Upgrades and
Assessments
Enterprise
Resource
Planning (ERP)
•
System Selection
•
Implementation
•
Upgrades
•
Functional
Enhancements
•
•
•
•
Application
Integration
Areas of
Expertise: J.D.
Edwards, Oracle
eBusiness Suite,
PeopleSoft, SAP,
OGSYS
Managed
Services
Treasury
Services
•
•
Improvement and
Automation of
Treasury and
Finance Processes
Asset Based
Lending Facilities
(ABL) Set-up,
Automation and
Maintenance
Treasury and
Cash
Management
Functions
•
System Support
•
Process Design
•
Report
Management
•
Quality
Assurance
•
System
Assessment
•
Middle Tier
Administration
•
Database
Support
•
System
Forensics/Root
Cause Analysis
•
Middle and Back
Office
processing
Financial Analysis
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25. Let’s Stay in Touch
Dan Masch
Tim McKone
Director,
Regulatory Compliance
DMasch@wgconsulting.com
C: 832.863.6659
Director,
Regulatory Compliance
TMcKone@wgconsulting.com
C: 713.962.5586
James Yu
Managing Director,
Trading & Risk Management
JYu@wgconsulting.com
C: 832.603.1572
For more information, email letstalk@wgconsulting.com
www.wgconsulting.com
WG Consulting, LLC
@thewgcpromise
WG Consulting
WG Consulting 1415 Louisiana, Suite 3450 Houston, TX 77002
Page 25
26. Appendix – Compliance Services
Dodd Frank & CFTC Final Rules
Trade Monitoring Service
All aspects of CFTC Final Rules implementing Dodd Frank,
including:
• Reporting requirements under Parts 43, 45, and 46 and LTR Part 20
• Business Conduct Standards (Internal and External)
• Confirmations, Portfolio Reconciliation, Portfolio Compression, and
Swap Documentation Standards
• Whistleblower Provisions
• End User Exception to Clearing
• Commodity Options
• Chief Compliance Officer duties
• Prohibition on Manipulation
• SD Registration and de-minimis calculations
• WG SMEs review our client’s trading activity against a variety of
Scenarios to identify potential areas of exposure for further
investigation
• WG SMEs have designed the Scenarios and coded the logic within
its monitoring tools, and use these tools to analyze the client’s
trades and trading patterns
• These Scenarios incorporate the factors that underlie many of the
violations described in enforcement actions and experienced by
WG SMEs during our industry practice
• The basis of the approach is identifying trading anomalies based
on patterns of behavior, activities and market movements , and
applying the knowledge and experience of WG SMEs to highlight
targeted high risk activities for mitigation
• It is a robust, secure and cost effective approach that supports our
client’s efforts to take reasonable steps to prevent and detect noncompliant activity, thus effectively mitigating the risk of violations
while satisfying Regulatory expectations
Services include:
• Explaining the requirements and validating the specifications
• Training applicable personnel on the Rules and the resulting
Policies, Procedures and Manuals
• Providing IT and business process support, including coding,
mapping and source system modifications
• Performing gap analyses, measuring current practices against the
requirements, and recommending solutions for closing those gaps
• Drafting Policies, Procedures and Manuals tailored to the client’s
commercial profile and internal controls
• Proposing monitoring activities to ensure compliance and prevent
evasion of the CEA and CFTC regulations.
• Reviews and testing
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27. Appendix – Compliance Services
The WG IT team, in conjunction with our Regulatory Compliance SMEs, understand the
regulatory requirements, source systems and most effective tools to deliver tailored
solutions that maximize efficiencies in support of your Program. We can assist in any part
of your compliance program in regards to the following:
Dodd Frank CFTC Final Rules
• SDR Requirements (Parts 43, 45 and 46)
• Assessing trade data setup
• Mapping of source systems to SDRs
• Gathering and validating reportable data
• Creating a common trade data warehouse for centralized reporting
• Enhancing systems and processes to align with regulations
• SD de minimis calculation
FERC
• EQR
• Natural Gas Order 704 Form 552
CFTC/Exchanges
• Position Limits Monitoring Tool
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28. Appendix - Policies, Procedures, and Training
While SD/MSPs are explicitly required to establish, document, maintain, and enforce a system of
written risk management policies and procedures designed to monitor and manage the risks
associated with its Swaps Activities (‘‘Risk Management Program”) by the Dodd-Frank Act, NonSD/MSPs are not. Though not a Dodd-Frank requirement for Non-SD/MSPs, an effective Risk
Management Program is an expectation. In order to be as prepared as possible, you should consider
implementing a Risk Management Program containing the following elements:
•
•
•
•
•
Identification of risks and risk tolerance limits, to be reviewed and approved quarterly by senior
management and annually by the Governing Body
Procedures for detecting risk limit violations and alerting senior management of the violations
Actions to mitigate specific risks, including: market, credit, liquidity, foreign currency, legal,
operational, and settlement
Periodic Risk Exposure Reports highlighting your risk exposures, to be submitted to senior
management immediately upon detection of any material change in risk exposures
New Product Policy, designed to identify and take into account the risks of any new product prior
to engaging in transactions involving the new product, and including an assessment, signed by a
supervisor in the risk management unit, as to whether the new product would materially alter
the overall entity-wide risk profile of your company
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29. Appendix - Policies, Procedures, and Training
•
•
•
•
Monitoring of compliance with the Risk Management Program, including policies and procedures
designed to detect and respond to violations of the Risk Management Program, encourage
employees to report violations to senior management without fear of retaliation, and take
specified disciplinary action against employees who violate the Risk Management Program
Distribution of its written risk management policies and procedures to applicable supervisors
Recordkeeping, including retaining copies of all written approvals required under the Risk
Management Program
An annual review and testing of the Risk Management Program policies and procedures
By creating, and complying with, a robust Risk Management Program you reduce the risk of being
assessed hefty penalties by the CFTC in the case of unknown or accidental rule violations.
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30. Appendix -Exchange Position Limit Monitoring
•
•
•
•
•
•
•
•
•
•
SD/MSP is to establish and enforce written policies and procedures reasonably designed to
monitor for and prevent violations of CFTC, DCM and SEF position limits and position limit
exemptions (“Position Limit Procedures”), including:
Converting all swap positions into equivalent futures positions (as required).
Annual training to all relevant personnel on applicable position limits and prompt notification to
them upon any change to these limits.
Diligent monitoring and supervision of trading personnel’s trading activity to ensure compliance
with SD/MSP’s Position Limits Procedures.
Implementation of an early warning system to notify applicable personnel when SD/MSP’s
positions are in danger of breaching the limits.
A process for promptly notifying SD/MSP’s Governing Body and the CFTC when a position limit is
violated.
Quarterly testing of SD/MSP’s Position Limit Procedures for effectiveness.
A quarterly written report that documents SD/MSP’s compliance with the CFTC’s position limits,
to be promptly reported to and reviewed by SD/MSP’s CCO, senior management and Governing
Body.
An annual audit of SD/MSP’s Position Limits Procedures as part of the audit of the Risk
Management Program.
A process for retaining documentation of the implementation of the Position Limit Procedures,
including training records, early warning notifications, quarterly testing and annual audit written
reports, and changes to the Position Limit Procedures.
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