While Dodd Frank’s transaction reporting components have remained a clear focus of compliance efforts during the past 18 months, other provisions within the Act’s general recordkeeping requirements have also emerged as a top priority for swap dealers. In particular, CFTC Regulation 46.2 has imposed ISDA contract management requirements that demand more detailed reporting of potential counterparty exposure. These include:[1]
- Swap dealers must retain ISDA Master Agreements, CSAs, relevant amendments, and confirmations, in electronic form, for swap transactions in existence on or after April 25, 2011
- Relevant agreements must be retained through the life of a relevant swap and for five years after termination of the swap
- Relevant agreements be retained by swap dealers in a form that is electronically accessible by counterparties, and that those agreements are retrievable by counterparties within 3 business days
Reg 46.2 was the product of an extensive dialogue between regulators and market participants focusing on the importance of regulators having greater access to Master Agreement and CSA terms when evaluating potential OTC market exposure scenarios in the aftermath of the financial crisis, and joint SEC/CFTC feasibility studies, which initially discussed the concept of a “Master Agreement Library” that would require swap dealers to submit Master Agreements and CSAs to a central electronic database under regulatory control.[2] However, those studies also analyzed potential operational difficulties involved in constructing that type of global agreement repository, and ultimately concluded that the Act’s broader objectives would be more appropriately served by imposing the 46.2 requirements above on swap dealers and subjecting dealer compliance to regulatory oversight. One study noted:[3]
“A master agreement library is probably…an expensive definition of what is in Dodd Frank…..there’s so many different ways to use that data that just collecting it without understanding how you’re going to use it I think would be difficult and just incredibly complicated and expensive….Collateral is critical, (but) whether that means the prudential regulator needs to know all the details or whether it needs to be confident through its oversight of the entity that the entity has a good handle on that, and that the prudential regulator has the opportunity at any time to find out what that position will be or is….that’s a different scenario than everything flowing into the regulator.”
The practical result has been that 46.2 has become an impetus for swap dealers to look to contract management technology to manage and organize Master Agreement and CSA data in a manner that more quickly isolates key terms that frame relevant portfolio analyses, in order to develop internal contract management systems that address both regulatory reporting obligations and collateral management objectives. As one swap dealer noted: “(Dealers have invested in) systems to take the data that we have in our master agreements and in our transaction and data repositories to look at our exposures in different ways to understand what happens when a counterparty gets downgraded or a trigger or something happens in the market to stress test the portfolio. These are very, very complex calculations, and we make them available to our regulators already on a regular basis….and we do not rely on (previous analysis) of an agreement because it’s just too much of a risk at that point in time to rely on any interpretation that might have been done three years ago….there are technologies available that theoretically look at this stuff and get it in different ways.”[4] In a regulatory environment in which more detailed exposure reporting has become a norm, 46.2’s requirements will likely continue to emerge as a top priority for operational and compliance functions, and will likely continue to drive how swap dealers integrate technology into their ISDA contract management practices going forward.
By Ashoke Prasad, Assistant Vice President, Litigation Solutions
- See 17 C.F.R. §46.2(a)(1)- §46.2(a)(4)
- See Comment for Proposed Rule 75 FR 76573 (January 28, 2011); See “CFTC and SEC Joint Study on the Feasibility of Mandating Algorithmic Descriptions for Derivatives”(April 7, 2011)
- See Comment for Proposed Rule 75 FR 76573 at page 281
- See Note 3 at page 280