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Dodd-Frank: It's also about mind-set

Financial regulation has been the flavour of the month for quite a while now and arguably Dodd Frank has been the first name off many commentators’ lips. Whilst this is understandable given the size and complexity of the compliance efforts, one of the most controversial aspects of the Act is regulation around swaps and in particular the recording of all trading data related to swaps activities.

In Asia these regulations are not without their impacts; swaps dealers (SDs) and major swaps participants (MSPs) are subject to a number of record keeping requirements, all geared towards attaining a high level of transparency and enabling detailed trading records to be reconstructed in the event of a market event.

These requirements are broken down into three main areas when dealing with counterparties with facilities in the US:

1. Communications: SDs and MSPs must keep and maintain records of any oral communications (including phone communications) relevant to swap trade information prior to execution as well as other communications leading to the conclusion of a related transaction.

2. Search ability: The relevant records kept by SDs and MSPs must be identifiable, organised and searchable by transaction as well as counterparty, to allow any necessary analysis of the records to be done in a quick and efficient manner.

3. Time Details: A UTC (Coordinated Universal Time) timestamp must be used by SDs and MSPs in their records of quotations both before and at the time of a swap. By using a consistent and uniform system in denoting time, SDs and MSPs ensure that the precise time of any given transaction or communication can be quickly and easily determined.

On the face of it, these requirements do not seem that onerous. The majority of financial institutions are already recording and monitoring voice and email conversations. The issue is that trading now takes place over a wide variety of channels – text messages, IM and on mobile phones for example – and across a variety of jurisdictions. Whilst the technology challenges are surmountable, what’s key is the change is mind-set from the regulators. Institutions are no longer able to comply retrospectively and now need to think about pro-active compliance.

The requirements as laid out above highlight that institutions need to be able to forensically reconstruct each trade at the regulator’s request. It’s not enough to produce reams of papers and expect investigators to reconstruct the trade – this now needs to be done before it gets to them.

Rather than “compliance after the fact” institutions across the region will have to comply “on demand” and it’s this shift in outlook that may prove to be the most difficult part of Dodd Frank.



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