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Don’t Wave Dodd-Frank Goodbye Just Yet


by Anne-Charlotte Duhaut, Marketing Director at RegTek.Solutions 

Earlier this year, our industry marked a somber anniversary.  Just ten years ago, the overnight disappearance of Lehman Brothers, one the biggest and supposedly safest firms in the world threatened the implosion of the entire financial system. As a direct response, two politicians gave their names to history (we also named the two boardrooms of our NYC office after the same guys, but we’re regulatory geeks so don’t blame us) with a colossal piece of financial reform aimed at “promoting the stability of the United States by improving accountability and transparency in the financial system”. I am referring to the Dodd-Frank Wall Street Reform and Consumer Protection Act, or DFA as we call it.

Coincidently, 2018 also marked the current US administration’s most aggressive effort to keep its campaign promise to relieve firms of their regulatory burden. In May, the President signed a bill into law dismantling parts of the Dodd-Frank Act with those in favor arguing the move will enable smaller banks to lend and compete more easily. Deregulation seemed underway, though the recent change of control in ‘The House’ will likely put the brakes on these efforts.

Regardless of political leanings, one could be easily forgiven for coming to the conclusion that the implementation and enforcement of stringent trade and transaction reporting obligations aren’t at the top of Washington’s to-do list. But that would be underestimating two forces to reckoned with. Namely, The Commodity Futures Trading Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC), two institutions whose prerogatives were bolstered by the Dodd-Frank Act.

Over the past few years, the CFTC hasn’t shied away from reminding firms of their obligations under Part 43 and 45 of the Dodd-Frank Act or should we say their failures in meeting said obligations in a way that would help the regulator fulfill its mandate to improve markets’ transparency. Prime examples of this would be an advisory letter from the Division of Market Oversight[1] issued at the end of 2015 to remind Swap Dealers of their obligations to provide accurate and timely information and data. The letter addressed the data quality challenge head-on and outlined the need for firms to implement controls and solutions to improve it. Subsequently, in 2017, the regulatory body announced a review of its Swaps Reporting Regulations by publishing a ‘Roadmap to achieve high quality swaps data’[2]. Finally, the Swaps Regulation Version 2.0 whitepaper published in April of this year sees the regulator putting great emphasis on swaps reporting rules.

Regulatory reporting is not going away anytime soon, per the Chairman’s words:

“Of all the swaps reforms to emerge from the financial crisis, visibility into counterparty credit risk of major financial institutions was perhaps the most pressing. The regulatory failure to complete it is certainly the most disappointing. (…) The CFTC is committed to success in the global reform efforts towards swaps data reporting. That means devoting high-level resources and effective project management to complete the process of data standardization and cross-border harmonization.”[3]

On the other hand, the SEC has been less bullish in its approach and has endured delays in its implementation of reporting obligations. A compliance date for SBSR (Security-based swaps reporting) has yet to be announced. Whilst the majority of the rules were published in 2015, the regulation has suffered delays as rules that would trigger the timeline for implementation have yet to be finalized. But a recent development could signal the end of the status quo. On October 11, the regulator demonstrated renewed interest in completing the regulatory regime for security-based swaps (SBS) by re-opening the comment periods for a number of rules that were previously proposed but never adopted[4]. SBSR admittedly does not feature heavily in the paper, but the dynamic should not be overlooked. With the regulator indicating that SBSR’s compliance date would depend on other aspects of the regulation being adopted, this activity at the SEC only leads us to assume that reporting is far from being shelved.

Despite the CFTC and the SEC moving at different speeds, a recurring challenge can be observed that spans both impacted firms and regulators. That is data quality. The CFTC is actively encouraging firms to focus on improvements to the quality of data it receives, while the SEC mulls over ways to establish a framework which would help it fulfill its mandate.

Data quality issues have been well documented on both sides of the Atlantic, often resulting in negative headlines and hefty fines. Firms face the enduring challenge of balancing the risk and cost associated with providing regulators with the timely, complete and accurate data that’s demanded of them.

The implementation of controls and solutions to ensure the quality, completeness, and accuracy of data is now recognized as a crucial step for any firm wishing to achieve sustainable compliance, and in turn allow the regulator to achieve its mandate. One of the CFTC’s recommended best-practice for firms having to comply with Part 43 and 45 of the DFA was to implement a data gatekeeper, or ‘automated systems that perform verification processes to identify errors prior to reporting’[5]. Best practices are also emerging thanks to industry initiatives to mutualize the knowledge and experience of reporting, with vendors capitalizing on these to offer cost-efficient ways to cope with the regulatory burden and improve data quality significantly.

We may live in unpredictable times, but one thing is for sure, the regulators’ push for transparency isn’t showing any sign of slowing down, and firms need to put data quality at the top of their agenda. The regulators surely are.







The views and opinions expressed in this article are those of the authors and do not
necessarily reflect the official policy or position of the company.