Embed Size (px)
Citation preview
1 www.monticellocg.com
“With their solid reputation for implementing robust testing governance and their business acumen in Dodd-Frank regulations, we brought in Monticello Consulting to help with our real-time reporting of OTC derivatives. The Monticello team was extremely focused on the timely delivery of the program in the face of aggressive regulatory deadlines, and their managers demonstrated a commitment to quality throughout.”
–Managing Director, Global Banking Client
4th Quarter 2013
Implementing Dodd-Frank and EMIR Regulations for OTC Swap Market Participants
2 www.monticellocg.com
Implementing Dodd-Frank and EMIR Regulations for OTC Swap Market Participants
Regulatory changes impacting the OTC derivatives markets, as introduced by the Dodd-Frank Wall Street Reform and Consumer Protection Act in the United States and the European Market Infrastructure Regulation (EMIR) in Europe, are reshaping the way dealers and end-users leverage these instruments for risk hedging and trading activities. The following regulatory-driven mandates are transforming the historically bilaterally traded global OTC derivatives market.
• All OTC derivatives trade data must be routed and stored in a designated swap data repository (SDR). As of March 2013, the three leading repositories to support both CFTC and EMIR reporting requirements were:
SDR Vendor CFTC SDR Approval Status EMIR SDR Approval Status
DTCC Approved Application Pending
ICE Approved Application Pending
CME Group Approved Application Pending
• The introduction of centralized clearing through a central counterparty (CCP) that will decrease counterparty and settlement risks, which in turn will decrease overall systemic risk.
• The establishment of a central limit order book (CLOB) trading module called a Swap Execution Facility (SEF) through which the standardization of derivatives instruments will drive transparency in pricing and liquidity.
SWAP MARKET PARTICIPANTS RESPOND TO CHANGES
As we move through 2013, the final stages of Dodd-Frank rule implementation regarding the trading of OTC derivatives (i.e. swaps trading on SEFs, additional instruments subject to mandatory clearing via CCPs) are now in flight but have created several conundrums for the industry to consider:
• Many OTC swap market participants have been utilizing existing listed derivatives exchanges to trade and hedge part of their economic exposures. These OTC swap market participants have posted margins and/or collateral at these exchanges’ clearinghouses and find it very expensive to re-post at the newly formed CCPs as required by the Dodd-Frank Act. Furthermore, regulations prohibit them from posting just one set of collateral across asset classes and net out their margin requirements between the exchange clearinghouse and the CCP.
• Futures Contracts (even though not an OTC derivatives product) will continue to promote greater price transparency, regulatory certainty, standardization, liquidity and capital efficiency via netting margin requirements of listed derivatives contracts across all asset classes at the exchange clearinghouse.
• It is commonly recognized by all industry participants that there are additional costs, such as technology and operations, associated with setting up the proper infrastructure to facilitate efficient trading, clearing, settlement and meeting additional collateral and margin requirements.
3 www.monticellocg.com
Case 1: Dodd-Frank SDR Position Backloading Historical Backload of Positions to Meet Compliance Objectives
Monticello Consulting partnered with a global bank to successfully execute their backload project on time and in compliance with all regulatory requirements for Dodd-Frank Reporting:
• Millions of trades to report across multiple front office systems
• Complex reporting rules, across multiple regulatory regimes
• Stringent regulatory timelines
KEY MONTICELLO DIFFERENTIATORS
• Technical Expertise:
• Data management tools (Access and SQL Server Databases development)
• Knowledge of client trading systems
• Synchronization of technical team activities
• Comprehensive run book execution – “Planning through to Delivery”
MONTICELLO CONSULTING SERVICES
• Reporting and reconciliation of all backloaded positions
• Planning and implementation of all runbook activities
• Over 99% backload success rate
Case 1: Dodd-Frank SDR Position Backloading
CFTC Backloading Timeline
The slow pace of regulatory rule-making, combined with a burdensome swap dealer registration process and costly margin requirements for swaps, has opened a window of opportunity for several existing listed derivatives exchanges to introduce futures contracts on OTC swaps across different asset classes. Some examples of this are:
• Energy traders fleeing OTC swap markets to trade standardized futures contracts on economically equivalent OTC swaps through ICE
• Chicago Board of Options Exchange has rolled out futures contracts on OTC variance swaps (to trade spreads on volatility)
The industry anticipates that some of these exchanges will look to introduce futures contracts tied to broad-based index credit default swaps during 2013. As of June 2013, ICE began offering futures on a limited number of credit iTraxx and Markit indexes.
The derivatives industry participants have indicated that it is too early to predict which business model will garner the deeper pool of liquidity in the long run. The exchange-traded version of OTC derivatives will exist concurrently with OTC derivatives that are centrally traded and cleared at the respective SEF and CCP venues. In the near term, both formats will serve their purposes by catering to the trading and hedging needs of the broader capital markets community around the world.
Joseph Hong is a project lead and developer specializing in large data migrations. Joe is currently is currently working with the regulatory reporting team on remediating portfolio reconciliation data issues.
Robert Adams is a senior manager with significant expertise in big data analysis for complex change programs. Bob is currently advising clients on improving data quality for CFTC and JFSA regulatory reporting.
4 www.monticellocg.com
Case 2: Regulatory Reporting Testing GovernanceImproving Quality Assurance to meet stringent regulatory requirements & timelines - Structured Testing
• Coordinate registered swap dealer testing across all products for Part 43/45 of Dodd-Frank Title VII
• Ensure front office systems and new regulatory reporting platforms fulfill reporting requirements
• Validate use-cases & test scenarios covering US, JFSA, and ESMA regulatory regimes
KEY MONTICELLO DIFFERENTIATORS
• Effective communication with stakeholders (steering committees, change managers, developers, testers, industry vendors)
• Hands-on and results-driven approach in conjunction with reporting metrics to produce high quality testing
• Seamless integration with client teams for cohesive execution
DEMONSTRATED EFFECTIVENESS
• Our client completed UAT and Regression testing for CFTC and JFSA reporting on time
• Client testimonial: “The Monticello team was extremely focused on the timely delivery of the program in the face of aggressive regulatory deadlines, and their managers demonstrated a commitment to quality throughout.”
• Testing metrics illustrated daily and weekly progress along with open and resolved defects
Case 2: Regulatory Reporting Testing Governance
Anthony Poerio manages the latest regulatory reform projects such as SEF trading, mandatory clearing, new CFTC reporting requirements, and EMIR|HKMA|MAS jurisdictions for real-time reporting.
Kenny Zee is a project manager with over 14 years of delivery experience. Kenny currently assists clients with new CFTC reporting requirements, cross-border guidance, and EMIR|JFSA jurisdictions for real-time reporting.
Jeff Dziegielewski is a business analyst with experience managing UAT for large initiatives. Jeff presently oversees the cross-asset UAT for new CFTC reporting requirements and EMIR|HKMA|MAS jurisdictions.
5 www.monticellocg.com
Case 3: SEF Strategy Assessments & Implementation for Swap Dealers
Monticello Consulting conducted a preliminary SEF strategy and impact assessments for a major bank’s credit, rates, foreign exchange, commodities, and equities trading operations.
Case 3: SEF Strategy Assessments & Implementation for Swap Dealers
Anthony Poerio manages the latest regulatory reform projects such as SEF trading, mandatory clearing, new CFTC reporting requirements and EMIR|HKMA|MAS jurisdictions for real-time reporting.
• Monticello Consulting assembled initial use cases in line with legal opinions on proposed SEF operation and showcased pre-SEFs vendors (Bloomberg, TradeWeb, and MarketAxess) and technology solutions to front office decision makers.
• This effort assisted our client in formulating a strategy for adapting existing trading platforms to comply with the new SEF rules for executing swap trades on these new centralized order books.
• In 2013, Monticello Consulting continues to be engaged with a major dealer of swaps to prepare our client for the transition from in-house reporting of swaps to applicable SEF platforms to comply with the ‘Made Available to Trade’ (MAT) rule.
William Morgan, the founder and president of Monticello Consulting Group, is an experienced business and implementation manager with over 16 years of consulting expertise across several industries.
6 www.monticellocg.com
When to Call on Us
• You are aware of impending market or regulatory change and seek experienced partners who continually monitor key trends in the financial markets
• US Regulatory Reform (Dodd-Frank) including Real-time Reporting, Mandatory Clearing & Business Conduct rules
• Other regulatory reform regimes (JFSA, EMIR & Basel III) are mandating compliance changes to your operations
• You have decided to embark on a change initiative and need a strategic partner to assist in carrying it through to completion
• Competitive pressures are forcing you to rethink your market strategy
• Your clients are seeking new products and/or superior service levels that you cannot offer today
• Your business is seeking new growth but is limited by platform constraints
Virginia HeadquartersP.O. Box 28037
Richmond, VA 23228
New York Office35 W 38th Street
2nd Floor, Suite 2SNew York, NY 10018
www.monticellocg.com
Monticello Consulting Group, Inc.
