Provides
standardized messaging
formats for regulatory
reporting
24/7 support for
regulatory questions
and issues
Messaging
Assistant
Page 22
Compliance Message Management System (cont.)
Benefits of CMM:
- Automates Dodd-Frank regulatory reporting requirements
- Reduces internal compliance costs and resource needs
- Provides 24/7 monitoring and support for regulatory issues
- Future proofs your organization for changing regulations
- Scalable solution that grows with your business needs
- Hands-off approach allows IT/Compliance to focus on value-added tasks
As of May 2012
Page 23
Questions?
As of May 2012
Practical Implementation of Dodd-Frank for End Users Webinar
1. The Practical Implementation of
Dodd-Frank for End Users
A Webinar Presented by WG Consulting
& Jackson Walker LLP.
www.wgconsulting.com
2. Our Presenters
Craig Enochs, Partner
Jackson Walker L.L.P.
Kevin Page, Associate
Jackson Walker L.L.P.
As an expert in deregulated energy
transactions, including asset-based
structured transactions, transactions for
the purchase and sale of energy-related
commodities, transmission arrangements
and transportation for these
commodities, and commodity-based
financial derivative transactions, Craig
will share his insights into Dodd-Frank's
impacts.
Kevin focuses his practice on commodity
marketing and trading activities in wholesale
and retail energy markets, as well as
financial derivative transactions that impact
energy, banking and financial services
clients.
Dan Masch, Director
WG Consulting
James Yu, Partner
WG Consulting
Dan's background in oil & gas commodities
markets and trading software provides a
knowledgeable compliment to his deep
understanding of the Dodd-Frank rules and
regulations and how they affect energy clients
on a system and business process level.
James is currently working with financial
and energy clients to assist them in
understanding the practical implications of
the Dodd-Frank regulations and its impacts
on their systems and business processes.
James will share his insights into the DoddFrank technical impacts and applicable
solutions for your business.
Page 2
4. Beyond the Scope of Our Discussion
• Swap Confirmation and Documentation Standards
• Credit Support Requirements for Uncleared Swaps
• Various other SD/MSP Requirements:
•
Documentation Procedures
•
Registration with CFTC
•
Capital and Margin Requirements
•
Additional MSP/SD Reporting
• Anything outside of Title VII of the Dodd-Frank Act
As of May 2012
Page 4
5. Swaps Under Dodd-Frank
• Proposed by the CFTC as “Swaps:”
•
Physical commodity options.
•
Commodity swaps and energy swaps.
•
Any transaction willfully structured to evade Title VII requirements.
• Physical Commodity Options:
•
Financial transaction via payment of option premium.
•
Physical delivery only occurs if option is exercised.
•
“Trade Option” Exemption:
•
Offeror: either (i) an eligible contract participant (“ECP”), or (ii) a producer, processor
or commercial user of the commodity subject to the option transaction and entering
into the option for purposes related to its business (a “Commodity Option User”).
•
Offeree: must be a Commodity Option User.
•
Physical delivery is intended.
*See CFTC Final Rule and Interim Final Rule: “Commodity Options,” 77 Fed. Reg. 25,320 (April 27, 2012).
As of May 2012
Page 5
6. Swaps Under Dodd-Frank (cont.)
• Physical Commodity Options (cont.)
•
Even if the Trade Option Exemption applies and the physical commodity option is not
considered a “Swap,” certain regulations still apply to the Trade Option:
•
Recordkeeping for regulators’ use.
•
Regulatory reporting if a party to the Trade Option already is required to report as to
other types of Swaps.
•
If neither party is required to report under § 729, both parties to the Trade
Option still must submit a Form TO annually with the CFTC.
•
Large trader reporting
•
Position limits
•
MSP/SD duties
•
MSP/SD reporting and recordkeeping
•
Capital and margin requirements
•
Anti-fraud provisions
*See CFTC Final Rule and Interim Final Rule: “Commodity Options,” 77 Fed. Reg. 25,320 (April 27, 2012).
As of May 2012
Page 6
7. Swaps Under Dodd-Frank (cont.)
• Forward contracts in non-financial commodities are generally excluded from the
definition of “Swap.”
•
The parties must intend for the transaction to be physically settled at the time the parties
enter into the transaction.
•
Physical bookouts qualify for the forward exclusion if (i) the parties regularly trade physical
commodities in their ordinary course of business, and (ii) the bookout is effectuated
through a separately negotiated agreement.
• Embedded Options:
•
Physical forward contract, but option to adjust price/quantity/term.
•
CFTC must analyze on a case-by-case basis to determine whether a “Swap.”
•
Key Issue: does the embedded option undermine the overall nature of the contract as a
forward contract for physical delivery?
•
Option to adjust price
•
Option to amend physical delivery requirement
*See CFTC Proposed Rule: Further Definition of “Swap,” 76 Fed. Reg. 29,818 (May 23, 2011).
As of May 2012
Page 7
8. Classifications
Swap Dealer (SD)
Major Swap Participant (MSP)
A SD holds itself out as a dealer in Swaps, makes
a market in Swaps, regularly enters into Swaps
with counterparties, or engages in activities
causing itselt to be commonly known in the
trade as a dealer or market maker in Swaps.
An MSP maintains a “significant position” in any
of the major Swap categories, has outstanding
Swaps that create “substantial counterparty
exposure”, enters into Swaps to hedge risks, or
is a Financial Entity that is highly leveraged and
maintains a substantial position in Swaps.
Non-SD / MSP – End User
Financial Entity
Everyone that is not considered a Swap
Dealer or Major Swap Participant
Classification as an MSP, SD or End User
applies on a trade-by-trade basis
As of May 2012
Banks, private funds, employee benefit plans
Includes MSPs and SDs
Page 8
9. End User Exception to Clearing
•
One party is not a Financial Entity.
•
The Swap is used by the non-Financial Entity for hedging purposes.
•
Information about the Swap is reported to a swap data repository (“SDR”).
•
More than one party can invoke the End-User Exception.
•
Notice must be provided to the Commission (or SDR) on a trade-by-trade basis as to
how the End User generally meets its financial obligations associated with entering
into non-cleared Swaps. Notice must include:
•
Corporate information for the End User
•
SEC registration information (if applicable)
•
Financial obligations can be explained via:
•
Written credit support agreement
•
Pledged or segregated assets
•
Written third-party guarantee
•
Solely the electing counterparty’s available financial resources
As of May 2012
Page 9
10. Position Limits
•
Position Limits will be reported for:
•
28 Core Referenced Futures Contracts (“CRFCs”).
•
Any Swap “economically equivalent” to a CRFC.
•
•
Example: Swap based on the same index reference price as a CRFC.
Spot-Month Limits
•
•
Effective 60 days after CFTC finalizes and publishes the term “Swap.”
•
•
Trading positions generally determined at close of business on the third business day prior
to the last day of trading the CRFC.
Separately applicable limits to physical and financial positions.
Non-Spot Limits
•
Limits apply to trading positions held in a single contract month or all contract months
combined.
•
Effective within one month after the CFTC has twelve months of open interest data under
Dodd-Frank large trader reporting rules.
As of May 2012
Page 10
11. Position Limits (cont.)
• Bona Fide Hedging Transactions
•
Exempt from position limit regulations
•
The transaction or position must meet all of the following criteria:
• Substitute for transactions/positions in a physical marketing channel;
• Economically appropriate to the reduction of risks in the conduct and
management of a commercial enterprise;
• Arises from the potential change in value of assets or liabilities a person
owns or services a person provides;
• Must offset price risks incidental to commercial cash or spot operations;
• Must be established and liquidated in an orderly manner in accordance with
sound commercial practices.
As of May 2012
Page 11
12. Historical Swap Reporting
• Despite not meeting the definition of an SD or MSP, End Users do still have
some obligations for reporting.
• If in existence on or after April 25, 2011:
• Initial data report to SDR submitted by Compliance Date:
• Primary economic terms of Historical Swap
• Internal Identifiers for the reporting party, its counterparty and the
transaction
• If uncleared Historical Swaps: must report Swap continuation data during
remaining term (per Regulatory Reporting requirements).
• If expired or terminated before April 25, 2011:
• Initial data report to SDR submitted by Compliance Date:
• Data in the reporting party’s possession as of April 25, 2011.
*See CFTC Final Rule, “Swap Data Recordkeeping and Reporting Requirements: Pre-Enactment and Transition Swaps” (May 18, 2012).
As of May 2012
Page 12
13. Historical Swap Reporting (cont.)
• Reporting Party:
• Determined in the same manner applicable to reporting of new Swaps.
• For End Users: Generally no reporting unless Historical Swap was
entered into (i) off-exchange and not cleared, (ii) with another End User.
• Compliance Date for End Users: 180 days following the later of—
• 60 days following publication of the final definition of “Swap,” and
• December 31, 2012.*
*See CFTC Proposed Order, “Second Amendment to July 14, 2011 Order for Swap Regulation,” 77 Fed. Reg. 28,819 (May 16, 2012).
As of May 2012
Page 13
14. Regulatory Reporting Obligations
Executed on SEF or DCM
Cleared
End User has no reporting requirements.
Not Executed on SEF or DCM
Cleared & accepted before applicable
deadline*
End User has no reporting requirements.
Cleared & not accepted before
applicable deadline*
End User reports:
PET data as soon as technologically
practical, but no later than the
applicable deadline.*
Not Cleared
Not Cleared
End User reports:
End User reports:
Valuation data on a quarterly basis.
Continuation data for the first year of reporting by
the end of the 2nd business day after a change has
been made to a primary economic term on the
Swap. After the first year of reporting, such changes
must be reported by the end of the 1st business day.
Valuation data on a quarterly basis.
Confirmation data within 48 hours after confirmation during first year of reporting;
within 36 hours during second year of reporting; within 24 hours after the second
year.
Continuation data for the first year of reporting by the end of the 2nd business day
after a change has been made to a primary economic term on the Swap. After the
first year of reporting such changes must be reported by the end of the 1st business
day.
PET data as soon as technologically practical, but no later than the applicable
deadline.*
*Applicable deadline for swaps subject to mandatory clearing: 4 hours after execution in year 1, 2 hours after execution in year 2, 1 hour after execution after year 2
As of May 2012
Page 14
15. Real-Time Public Reporting
Reporting Party
•
If executed on an SEF/DCO, the SEF/DCO Reports
Swap executed on an
SEF/DCO
•
SDR
If not executed on an SEF/DCO, and the swap includes an SD/MSP, the SD/MSP is responsible for
reporting
Swap not executed on
an SEF/DCO &
includes an SD/MSP
•
SEF / DCO
SD / MSP
SDR
If not executed on an SEF/DCO, and the swap does not include an SD/MSP, then the parties will
decide who will report
Swap not executed on
an SEF/DCO & does not
include an SD/MSP
As of May 2012
End User
SDR
Page 15
16. Real-Time Public Reporting
•
Data: Public, non-proprietary information related to Swap—including:
•
•
Price
•
Payment frequency
•
Whether the End User Exception applies to the Swap
•
Whether the Swap is cleared or uncleared
•
If uncleared, information on how the Swap is being collateralized
•
•
Start date and end date
Identification of the parties to the Swap is not reported
Timing: As soon as technologically practicable after “execution”
•
“Execution”: parties are legally bound by agreeing to economic terms
•
Execution v. Confirmation
•
Reportable Swaps: Swaps executed at arms’ length, or a termination or change made at arms’ length that
impacts a Swap’s pricing.
•
SDR Interfaces: Despite the current inability to send test files to SDRs the compliance deadlines are still expected
to remain in effect. To address the tight deadline turnarounds that are being required, companies are seeking
out pre-packaged software reporting solutions.
As of May 2012
Page 16
17. Record Retention
• Despite not meeting the definition of an SD or MSP, End Users do still have some
obligations for record retention.
• Pre-Enactment and Transition Swap Records:
• Swaps entered into and effective by July 21, 2010 (“Pre-Enactment Swaps”)
• Swaps entered into after July 21, 2010 but prior to the effective date of full Swap data
reporting regulations (“Transition Swaps”)
• “Historical Swaps” = Pre-Enactment and Transition Swaps
• Swap Records for Use by Regulators:
• Records must be retained throughout life of the Swap plus five years, and at all times data
must be retrievable within 5 business days if requested by regulators.
Swap
Executed
Swap
Terminated
Swap Transaction
Swap Plus 5 years
Entity Must Be Able to Retreive Data Requested within 5 Business Days
As of May 2012
Page 17
18. CFTC Rule Definitions To Date
Jan 2012
Apr 2012
May 2012
Summer 2012
CFTC publishes
Swap data
recordkeeping and
reporting
requirements
CFTC defines
Swap Dealer
and Major Swap
Participant
CFTC publishes
final Historical
Swap
recordkeeping
and reporting
requirements
CFTC to define
“Swap”
To Be Published
Published
2012
Recordkeeping, Reporting, and Designation rules have been defined. The CFTC is expected to define the term ‘Swap’ in the summer of
2012.
As of May 2012
Page 18
19. Impacted Business Functions
Deal Execution
Trading
Deal Capture
Origination
New Product
Development
Front Office Analytics
Curve Development
No Impact
As of May 2012
Transaction Support
Contract
Management
Credit
Margining
Regulatory
Reporting
Risk & Valuation
Valuation
P&L and Position
Limit Monitoring and
Reporting
External Reporting
Operational Risk
Reporting
Settlements
Broker / Exchange
Settlements
Deal Modification
ISO Settlements
Volume Actualization
Transportation Rate
Verification
Pipeline Statements
Counterparty
Settlements
A/R & A/P
Deal Validation
Counterparty
Confirmation
Potential Impact
Impact of Dodd-Frank
Page 19
20. Internal Business Training
• Deal Capture
•
New Fields
•
New Tables
• Regulatory Reporting
•
Reporting Processes and Timing
•
Error Processing and Timing
• Record Retention
•
Quick Access to Data
• Position Limit Monitoring
•
Threshold Watch
• Internal Sign-off Procedures
•
CCO Reports
•
CCO Sign-offs
• Legal Implications
•
Anti-Evasion Rules
•
Market Manipulation Guidelines
As of May 2012
Page 20
21. Internal Policies and Procedures
New internal policies and procedures will need to be enacted for End Users, including the
following:
Procedures
Policies
Chief Compliance Officer Report – CCO will
be responsible for maintaining compliance
with Dodd-Frank and should receive and
sign-off on a report that reflects the
organizations continued compliance
Reporting - Answering and documenting
key questions for your organization; such
as ‘How often and to whom must we
report under scenarios that align with our
“normal” business practices?’
Sign-Off of Uncleared Swaps –
Documentation of the internal sign-off
procedures for entering into an Uncleared
Swap
Trade Entry – Documentation of the new
business process for entering into a Swap
As of May 2012
Page 21
22. Compliance Message Management System
CMM is an enterprise system designed by WG Consulting and ZE, specifically for Dodd-Frank regulation
requirements. The CMM system provides hands-off regulatory reporting to automate business logic and
messaging, allowing the Compliance and IT departments to review the outbound and inbound messages to the
CFTC and external reporting entities.
•
Classification: Automates financial product
classification by trade
•
Scalability: Adaptive solutions to conform
with changing regulatory landscape.
•
Maintenance: Effective solutions which
provide minimal in-house messaging
maintenance or troubleshooting needed
•
Monitoring: Round-the-Clock messaging
monitoring service for ease of mind
Validation
Maintenance
Classification
Scalability
As of May 2012
Validation: Automates data and business rules
for efficient and accurate validation
•
Monitoring
Messaging: Creates all required reports with
messaging capabilities to CFTC and SDRs
•
Messaging
Page 22
24. Implementation Schedule
The schedule below shows a sample implementation schedule for a non-SD/MSP or End User in
order to achieve full compliance with the Dodd-Frank regulations.
Define Scope &
Gap Analysis
Functional &
Technical
Design
Build &
Test
Policy
Rewrites
Training
Practical Implementation Schedule for Compliance
Jun 2012
Jul 2012
Aug 2012
Sep 2012
Oct 2012
Nov 2012
*The implementation schedule above assumes that ‘Swap’ is defined and published by the CFTC in June of 2012
As of May 2012
Dec 2012
Full
Compliance
Required
By January
2013*
Jan 2013
.
Page 24
25. End User Checklist
Transactions
Monitor transaction for classification changes
For uncleared Swaps, draft explanation to CFTC regarding how you are meeting financial obligations
absent clearing
Clearing House Decisions
Opt-out of clearing requirements and elective clearing, if desired
Evaluate whether to use clearinghouses and if so, which ones
Reporting & Recordkeeping
Pre-Enactment and Transition Swap Reporting
Real-Time Public Reporting of Swap Data
Regulatory Reporting and Recordkeeping
Monitoring
Monitor Position Limits
Evaluate Contracts for Dodd-Frank Compliance
Monitor further CFTC rulemakings and clarifications of existing rules
As of May 2012
Page 25
26. End User Checklist (cont.)
System Updates
Data Fields
Messaging Updates
Record Reporting Updates
Record Retrieval Updates
Internal Business Training
Deal Capture
Regulatory Reporting
Record Retention
Position Limit Monitoring and Reporting
Anti-Evasion Rules
Market Manipulation Guidelines
Internal Sign-off Procedures
As of May 2012
Page 26
27. Integrated Legal & Compliance Solution
Your Organization
Jackson Walker
WG Consulting
•
Define scope of Dodd-Frank’s applicability
•
Identify data elements required under each
new rule
•
Evaluate classification as an MSP, SD or End
User
•
Perform a gap analysis of current system(s)
and processes
•
Notify of statutory and regulatory deadlines
•
•
Provide training as to Dodd-Frank obligations
Design and develop new reports and new
interfaces
•
Create and document new processes
•
Develop and facilitate necessary training
•
Provide interim CCO services
By teaming together, WG and Jackson Walker can provide clients with a more comprehensive and integrated Dodd-Frank solution than any
single consulting group or law firm can provide on their own.
As of May 2012
Page 27
28. Let’s Stay in Touch
Craig R. Enochs
James Yu
Partner,
Trading & Risk Management
JYu@wgconsulting.com
C: 832.603.1572
Partner
Dan Masch
Kevin M. Page
CEnochs@jw.com
O: 713.752.4315
Associate
Director,
Regulatory Compliance &
Dodd Frank Solutions
DMasch@wgconsulting.com
C: 832.863.6659
www.wgconsulting.com
WG Consulting, LLC
@thewgcpromise
KPage@jw.com
O: 713.752.4227
WG Consulting
WG Consulting 1415 Louisiana, Suite 3450 Houston, TX 77002
Page 28