CFTC regulations on trade reconstruction are changing the way firms need to think about compliance. Here’s a step-by-step guide to get started.
The Dodd-Frank Act unleashed an avalanche of new rules affecting the financial industry, chief among them the trade reconstruction requirement, which mandates that swap dealers are able to produce a complete reconstruction of a trade within 72 hours of a request by the Commodities Futures Trading Commission (CFTC). To solve for this complex challenge, swap dealers/firms must develop capabilities for correlating a broad range of structured and unstructured pre-trade, trade and post-trade data.
Bloomberg Vault recently hosted a webinar “Trade Reconstruction for Compliance Officers,” presented by Harald Collet, Global Head of Bloomberg Vault, and moderated by Mitch Avnet, Managing Partner, Compliance Risk Concepts, to help compliance officers understand the challenges and think strategically about the process.
“The endpoints of the reconstructed trade is to tie together the different elements: The structured data, including execution and post-execution confirmation and ledger data; unstructured data, such as sales and marketing; and finally communications data, the most complex data,” says Collet.
Among the key challenges facing compliance officers are:
- Searchability: Firms need to store information based on transaction and counterparty, which is particularly difficult as it relates to pre-trade information.
- Communications data: With traders having multiple ways to contact their counterparties, including voice communications, email and instant messaging, external proprietary messaging and chat, and social media, compliance officers are hard-pressed to manage and search the data in a timely manner.
- Other challenges mandated by the CFTC rules: Firms also need to figure out how to time stamp trade information in Coordinated Universal Time (UTC); store it on WORM [Write Once Read Many] media; and then produce of all the data within 72 hours.
To meet the challenges that trade reconstruction presents, Collet and Avnet recommend a four-phased approach:
Phase 1: Identify all systems and required data. Compliance officers need to ask questions including:
- What are the different data sources involved?
- Who owns the systems and who needs to be contacted?
- What form is the data in (i.e. does it meet the WORM storage requirement) and can it be extracted quickly?
- Is there a way multiple systems can be consolidated to speed trade reconstruction?
Phase 2: Searchability
- What are the legal requirements for those data sources?
- Is the data stamped, searchable and exported with UTC time stamps?
- Is it searchable by counterparty or trade?
- Is it possible to attach additional identifier tags to the data?
Phase 3: Timely Response
- Do you have the ability to pull out the data to review, consolidate, package and submit it for regulators?
Phase 4: Simulation
- Are there gaps in the process?
- Have the gaps been documented? Is there a remediation plan?
Trade reconstruction is a journey, says Collet. “This will be a long road to reach fully reconstructed trades, given the many transaction systems, communications formats involved, as well as the emerging markets understanding of the stance that the regulators will take in enforcement.”
Avnet adds that while the topic of the webinar is trade reconstruction, a larger problem needs to be solved. “It’s really about a bigger issue that faces the financial industry. And that is, in an age of Big Data, compliance officers struggle across the entire industry to gather information across bifurcated, disparate systems. So trade reconstruction is a good opportunity to take advantage of the CFTC requirement by really forcing [compliance officers] to think about how to really bring all of this information together into a cohesive and consistent state.”
Register now for the next Bloomberg webinar on Trade Reconstruction, which is scheduled for Sept. 16 at 1pm ET.
For more information about best practices for managing swap trade reconstruction, download Bloomberg’s practical guide for compliance officers.