Energy Trading Operations & Technology Summit 2011

Presentation: Swap Data Reporting Building a robust compliance reporting regime Arun Karur, Global Head of Commodities, Sapient Global Markets

Regulatory Reporting | building a robust compliance regime

ETOT Summit 2011

Contents
Title

Regulatory Reporting Landscape

1 2 3

Industry Overview Reporting Scope Challenges and Opportunities Solution Roadmap

4 5

Where do you start? Execution Roadmap

6
7

How do you stay compliant?

Solution Options Conclusion
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Regulatory Reporting Landscape

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Regulatory Reporting Landscape

G20 Commitment: OTC derivative contracts should be reported to trade repositories

However, a patch-work of similar yet divergent rules have emerged significantly complicating compliance for global market participants Dodd-Frank sets the bar high:
Real-time price report Primary economic terms, confirmation, daily snapshot & valuation (effectively all the terms necessary to value the instrument) Limited variation by asset class

Non-G20 jurisdictions have overlaid requirements on that:

Complicate the business logic needed to comply with local reporting rules (proprietary formats, reporting entity classification) Expand the product scope and scale beyond OTC (i.e. Israel w/ FX spot & repo)

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Regulatory Reporting Infrastructure

Canada 1st of 8 Consultation papers issued. Initial paper relates to TRs European Union Hong Kong HKMA and HKEX announce TR offering. TR consultation underway

EMIR/MiFid consultations continue DTCC established TRs

Korea
BoK acts as a TR

Japan DTCC licensed for CDS TR

Spain BME (Spanish Exchange) and Clearstream plan to launch Spanish TR

USA Dodd Frank rule-making in progress Real-time, PET, confirmation, daily snapshots & valuations

Israel FX transaction & balance reporting to central bank China Taiwan Central bank TR consultation paper in-flight Gretai Securities Market to set up TR

CFETS is effectively a local TR and trading venue

India Expect CCIL to establish TR

Brazil
CETIP operating as a TR

Singapore Considering DTCC for TR

Australia
TR consultation in flight

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Global Regulatory Landscape

Timing challenges are significant and the potential for regulatory arbitrage and market fragmentation remains a high risk that must be monitored
2009 J F M A M J 2010 J A S O N D J F M A M J
Initial Proposal

2011 J A S O N D J F M A M J
Final Proposal

2012 J

Implementation

Global

FSB Paper Publication G20 Statement on derivatives CPSS / IOSCO Publication ODRF Paper Publication

G20 Meet in Cannes, France ODSG Commitments Letter BCBS Publication on CCP 2nd FSB Progress Report Basel III rules finalised CPSS IOSCO Guidance on TR

CPSS IOSCO Guidance on financial Market Infrastructure IOSCO Report on OTCD trading requirements with respect to products/participants

G20 Derivatives Deadline Basel III rules implemented

FSB Progress Report

North America

Expected date for federal legislation/ rule-making CSA Consultation Paper publication Dodd Frank Act Passed Start of CSA Consultation period Target date for title VII rule-making for Dodd-Frank End of CSA Consultation period Revised implementation timing of Dodd-Frank Mifid3 proposal ESMA Created MiFID Consultation Paper Target Date for Draft Capital Directive IV Draft legislations expected on OTCD (Q2) Adoption of Market Abuse Directive EMIR legislation BME TR due to launch Anticipated MiFID Adoption Implementation Target date for New OTCD regulations

EU

European Markets Infrastructure Legislation consultation begins CESR Publication

AustralAsia

SGX CCP live for IRS Financial Instruments and Exchange act Legislation due and not delivered HKMA and HKEx announce CCP and TR for OTCD

JSCC to start Clearing CDS (Q2)

CCP Consultation ends

Effective Date for CCP and TR Target date for establishment of CCP and TR (Q4) Possible start of operation of Shanghai Clearing House

SFC to consult market On new OTCD regulations (Q3) TR Consultation Paper Poland launches CCP submissions

Legislation or Directive Publication Date

Other date of note

CPSS-IOSCO Guidance on Sound X-border Oversight (Date tbc)

MiFID3 Adoption (tbc)

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Trade Reporting Obligations

Whilst trade reporting obligations are not yet clear under EMIR, Dodd Frank provides a very prescriptive view in terms of content and timeliness The role of a TR (or SDR under Dodd-Frank) will be to collate data from Market participants to provide public and regulatory reporting ISDA RFPs are in-flight to create industry preferred TRs though a number of jurisdictions have announced local TRs due to issues/concerns with cross-jurisdiction data sharing

DF Requirements

TR Landscape

SEFs

Markets Participants
(Bearers of Statutory Reporting Responsibility)

real time basic data

DCOs regulatory reporting detailed data daily updates from DCOs

real-time and regulatory reporting not otherwise covered

Reports, Recon, Query, Tracking

Red arrows potentially intermediated through confirm or middleware providers

Industry Mandated SDR for Relevant Asset Class

Real time price dissemination platform

Other regulator mandated public reporting

Regulator portal

Source: Mserv industry presentation - Jan 2011

Source: Mserv industry presentation - Jan 2011

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Impacts and Challenges

As a result of legislation being passed globally, operating models and the related infrastructure will have to undergo significant enhancements to be able to process and report on trades
Provide the necessary controls around: Trade identifiers (USI) Counterparty identifiers (UCI/LEI) Product taxonomy (UPI) The right level Inclusive of agents/3rd party activity Meaningful analysis(by regulators) Potential for multi-point reporting

Standardization

Aggregation

Orchestration

Across agents, 3rd parties, and market infrastructure components Business logic variation by regulatory jurisdiction: Timing Content & Message Quality Front-to-back (internally) With TR(s) With counterparties

Reconciliation

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Todays Discussion
Title XVI Section 1256 Contracts Title XV Miscellaneou s Provisions Title XIV Mortgage Reform and AntiPredatory Lending Act Title XIII - Pay It Back Act Title XII Improving Access to Mainstream Financial Institutions Title XI Federal Reserve System Provisions Title I Financial Stability Title II Orderly Liquidation Authority Title III Transfer of Powers to the Comptroller, the FDIC, and the Fed Title IV Regulation of Advisers to Hedge Funds and Others

Dodd-Frank Act

Title V Insurance

OTC derivative market participants have committed to a number of transparency and standardization targets driven either by the industry or by the regulatory community

Title X Bureau of Consumer Financial Protection

Title IX Investor Protections and Improvement s to the Regulation of Securities

Title VI Improvement s to Regulation Title VII - Wall Street Transparency and Title VIII - Accountabilit Payment, y Clearing and Settlement Supervision

Todays scope of discussion Title VII And Large Trader Reporting

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Scope and Timelines

Major elements of Title VII, Large Trader Reporting
Framework and definitions - SEC and CFTC oversight - Product definitions - Participant definitions Clearing and trading requirements - Mandatory clearing - Mandatory electronic trade executions - Trade reporting Regulation of SDs and MSPs - Registration - Capital and margin requirements - Business conduct standards Other

- Swaps push-out - Position limits

Whilst expectations within the industry are that deadline for final rules is likely to slip to early 2012, the scale of the change required remains

Phase I: Rulemaking
Regulators propose rules and solicit comments

Phase II: Implementation

Most rules become effective

Phase III: Effectiveness

Additional rule-by-rule phase in

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Scope Title VII Functional Requirements

Transparency Fundamental Requirements - Context Diagram
RP Functional Requirements
Reporting party eligibility RT Message Creation Verification Submission USI allocation UPI designation LEI/UCI designation Reconciliation - message Reconciliation trade Reconciliation data Control Framework Upload Pre-enactment Upload Post-enactment Upload Transition PDF submission (inc. header) Valuation message Valuation discrepancy mgt Collateralised Trade report Daily Position Reporting Onboarding strategy

Industry Data Requirements

UPI Solution USI Solution LEI/UCI Solution Event ID solution

NRP Functional Requirements

Verification Acknowledgement Processing PDF Signing Daily Position Reporting

SEF Functional Requirements

Submission RP Submission NRP USI allocation Control Framework Client onboarding

Mware Functional Requirements

Universal templates Template build Connectivity to TR USI allocation Affirmation message PDF submission (inc. header) Position submission (TRR only) Backload acceleration strategy Backloading tools

Transparency Core Process*

Reporting Party Non- Reporting Party

TR Functional Requirements
Recording to tape Acknowledgements PET record Reconciliation positions Reconciliation trades Trade record enrichment Data backfill Interim industry data solution Interim control reports Consume and store PDF Upload Pre-enactment Upload Post-enactment Upload Transition Update valuations Real-time dissemination Control Framework Snapshot reporting Client onboarding

Elec. Trading Venue (SEF) Middleware/ Affirmation

CCP Functional Requirements

USI allocation TR submission Close-out messaging (RP/NRP) Upload Pre-enactment Upload Post-enactment Upload Transition Control Framework Confirmation message Valuation submission Position submission Client onboarding Backloading

Industry Data Solutions

CCP (DCO)

1 5

3
Trade Repos. (SDR)

*Real-time, PET, Confirmation, Valuation, Public and Position Reporting

Non Functional Requirements

CPSS IOSCO Standards Marketing and outreach Dom. Regulators Lobbying and outreach Intl. Regulators SDR registration Client confidentiality TR charging models Capture extended build costs (TR, RP, Mware) Capture extended compliance cost (tiered) Capture extended implementation cost (tiered) Paper backloading Backloading reconciliation Independent price valuation

KEY:

KEY

Scope of existing DTCC PMO

Process Decision

Market Participant

Market Infrastructure

Trade processing

Reporting

Reporting in/out

Industry solution

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Scope Large Trader Reporting

Should register Maintain 2 new data elements LTID and time of transactions executed Report to Commission via EBS Monitor client accounts

Broker Dealer

Large Trader
Classification by volume or market value File Form 13H to identify and disclose LTID assigned and shared with BDs Provide Quarterly and Annual updates

Commission
Rule 13h1 and Form 13H under Section 13(h) Identifying a large trader Obtain trading information

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Scope Large Trader Reporting (Key Open Issues)

Determining Large Trade Status based on trading activity when the broker-dealer acts in different capacities (e.g., agency, riskless principal, proprietary)

Large Trader ID format

Inclusion of trading activity in EBS reports that are not traditionally reported today Responsibility for responding to Large Trader Reporting requests by broker dealers across the trade process (introducing, self-clearing executing broker, non-self clearing executing broker, clearing broker) Unidentified Large Trader identification internally and on EBS requests both before and after a customer confirms they are not a Large Trader Availability of Electronic Blue Sheets record layout Impact to current EBS practices, e.g., average price account reporting Necessity of furnishing LTID and execution time on Exchange SRO EBS Requests

Availability of additional details /specifics on SEC Large Trader Requests

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There are challenges

Fears
Deciphering the legislation is a uphill task

Uncertainties
Inability to predict the future shape of legal landscape

Doubts
Data confidentiality

High Capital Cost Slowdown in trading as firms fret over potential legal repercussions from conduct Mandatory clearing for end users of derivatives

Legality of some trades

Regulators ability to meet the deadlines No clarity on what to report and how to report and how will the data be used Exposures are seen in combination with the underlying physical position Risk Management activities should not be penalized

Classifications, Exemptions

CFTC, SEC differ on many rules

Increased entry barriers for new

Legal entities, global jurisdiction, territoriality

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but also opportunities

Build a compliance driven organization culture, process, people

More data will produce more opportunities for physical asset managers looking to optimize their hedging activities

IT investments in middleware, messaging platforms, system consolidations will lead to making better business decisions

Firms need to view this investment of time and money as a vehicle for strategic and competitive differentiation
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Solution Roadmap

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Put in place a Legislative Response Programme

Perform an assessment of trading activity and develop a view in terms of registration

Legislative Response Programme Context Diagram

Interpret rules

The next step is for the organisation to develop an understanding of the impact of this view on their infrastructure and operating models
The objective of the programme will be to develop a well considered target state and a roadmap for its delivery Recognise the need for strong PMO coordination with engagement required from FO, Risk, Legal, Compliance Tech and Ops across multiple locations

Define Eligibility

Programme Management Office

Interpret rules

Define policy

Assess Impact

Design Target Model

Develop Roadmap

Monitor Regulatory Landscape

TITLE V IIWALL STREET TRANSPARENCY AND ACCOUNTABILITY Sec. 7 01 . Short title. Subtitle ARegulation of Ov er-the-Counter Swaps Markets PART IREGULATORY AUTHORITY Sec. 7 1 1 . Definitions. Sec. 7 1 2. Rev iew of regulatory authority . Sec. 7 1 3. Portfolio margining conforming changes. Sec. 7 1 4. Abusiv e swaps. Sec. 7 1 5. Authority to prohibit participation in swap activ ities. H. R. 41 7 35 Sec. 7 1 6. Prohibition against Federal Gov ernment bailouts of swaps entities. Assessment of intended scope and potential1 high level implications of process. Sec. 7 7 . New product approv al CFTCSEC Sec. 7 1 8. Determining status of nov el deriv ativ e products. legislation Sec. 7 1 9. Studies. Sec. 7 20. Memorandum. PART IIREGULATION OF SWAP MARKETS Sec. 7 21 . Definitions. Sec. 7 22. Analysis of business model in relation to qualifying criteria to quantify Jurisdiction. Sec. 7 23. Clearing. eligibility for act provisions Sec. 7 24. Swaps; segregation and bankruptcy treatment. Sec. 7 25. Deriv ativ es clearing organizations. Sec. 7 26. Rulemaking on conflict of interest. Sec. 7 27 . Public reporting of swap transaction data. Sec. 7 28. Swap data repositories. Sec. 7 29. Reporting and recordkeeping. Internal interpretation of act provisions 7 30.legal counsel reporting. Sec. by Large swap trader Sec. 7 31 . Registration and regulation of swap dealers and major swap participants. Sec. 7 32. Conflicts of interest. Sec. 7 33. Swap ex ecution facilities. Sec. 7 34. Deriv ativ es transaction ex ecution facilities and ex empt boards of trade. Sec. 7 35. Designated contract markets. Sec. Development of internal compliance policy and procedures7 36. Margin. Sec. 7 37 . Position limits. Sec. 7 38. Foreign boards of trade. Sec. 7 39. Legal certainty for swaps. Sec. 7 40. Multilateral clearing organizations. Sec. 7 41 . Enforcement. Sec. 7 42. Retail commodity Assessment of current business model and associated gaptransactions. Sec. 7 43. Other analysis to requirements for compliance authority . Sec. 7 44. Restitution remedies. Sec. 7 45. Enhanced compliance by registered entities. Sec. 7 46. Insider trading. Sec. 7 47 . Antidisruptiv e practices authority . Sec. 7 48. Commodity whistleblower incentiv es and protection. Definition of a target state factoring inConforming amendments. Sec. 7 49. potential Sec. 7 50. Study on compliance opportunities and requirements forov ersight of carbon markets. Sec. 7 51 . Energy and env ironmental markets adv isory committee. Sec. 7 52. International harmonization. Sec. 7 53. Anti-manipulation authority . Sec. 7 54. Effectiv e date. Subtitleand reasonedSecurity -Based Swap Markets BRegulation of roadmap to Creation of a justified Sec. 7 61 . Definitions under the Securities Ex change Act of 1 934. deliver desired results Sec. 7 62. Repeal of prohibition on regulation of security -based swap agreements. Sec. 7 63. Amendments to the Securities Ex change Act of 1 934. Sec. 7 64. Registration and regulation of security -based swap dealers and major security based swap participants. Sec. 7 65. Rulemaking on conflict of interest. Sec. 7 66. Reporting and recordkeeping. Sec. 7 67 . State gaming and bucket shop laws. Sec. 7 68. Amendments to the Securities Act of 1 933; treatment of security -based swaps. Sec. 7 69. Definitions under the Inv estment Company Act of 1 940. Sec. 7 7 0. Definitions under the Inv estment Adv isers Act of 1 940. Sec. 7 7 1 . Other authority . Sec. 7 7 2. Jurisdiction. Sec. 7 7 3. Civ il penalties. Sec. 7 7 4. Effectiv e date.

Execute Strategy

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14 th JUNE 2011

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Conceptual Approach to Self Assessment

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Understand the Transaction Data Flows

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and the Format Complexities

Capturing the details of complex derivative trade types requires a comprehensive format SDRs, DCOs, and even regulators are adopting FpML to support SDR reporting + other processes (including clearing and regulatory reporting) ISDAs FpML group has set up working groups to support these areas, including
Regulatory Reporting
<publicExecutionReport fpmlVersion=5-3> <header> <messageId>123</messageId> <sentBy>NRGCORP</sentBy> <sendTo>SDR</sendTo> </header> <correlationId>123</correlationId> <trade> <tradeHeader> <!-- ... --> </tradeHeader> <commoditySwap> <!-- ... --> </commoditySwap> </trade> </publicExecutionReport>

Commodity (Regulatory) Reporting

Business Processes (including clearing)

Most derivatives firms will be affected by these tech standards

To be successful, its critical to keep up to date with them

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TR Target Operating Model & Automated TR Hub

Executive Forum (Quarterly)
Governance Top down Assurance

Accountability & Delegated Strategy Roles & Responsibilities Budget Allocation Horizon Scanning Change to BAU Industry Interaction Regulatory Interaction

Regulatory Reporting Forum (Monthly) Daily Monitoring / Assessment & Change (Quarterly)

People

Staff Awareness & Training

TRANSACTION REPORTING HUB

MI & Analysis Exception Management Workflow
Configurable Workflow Notification & Escalation
Manual Overrides & Audit Trail

Exceptions

System

Source Systems Reference Data

Exceptions

3rd P A R T Y I N T E R M E D I A R Y

Bottom Up Assurance

Geography

Completeness

Accuracy

Full F2B Trade Life Cycle: New Cancel Amends

Data Sourcing
Import Txns

Filtering
Rules Reportable Txns Audit Trail

Validation
Rules

Enrichment & Transformation

Import Static

Submission
Intermediary Response Handling Exception - III Audit Trail / History

Normalise

Validate

Fill Gaps

Store Exception I

Exception - II

Transform Multiple Regulators

R E G U L A T O R (s)

Product Client Instrument Exchange

Audit Trail

QA / F2B Testing (Completeness & Accuracy embedded in TRHub)

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Todays Solution Options

Build Bespoke internally

Solution Options

Consider a fit-forpurpose market solution (Sapient CMRT)

Retrofit using existing reporting, middleware solutions

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Sapient CMRT Solution Architecture

Compliance Management & Reporting Tool
Murex

Presentation Layer
Reference Data Managers Admin Module Transformation Builder Status Dash Board Audit Log Viewer

Adaptor

Rates
Scheduler Exception Viewer

SEC

Openlink

Solarc

Inbound Adaptors
Messages Bus

Data Transformation
Filter Aggregate Lookup Expressions Custom

Message Generation
FPML CSV XML Other

Outbound Adaptors
Messages Bus

CFTC

Adaptor

Commodities
Web Service
Bespoke

Others
Web Service FTP CSV SMTP

Flat File Database Others

Adaptor

Credit

Bespoke

Adaptor

Other

Raw Data DB

Interim Data Store

SCML Store

Msg. Store

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Conclusion
Regulatory Reporting is here to stay, will be global in nature and the landscape will continue to evolve over the next 6-18 months Despite the unknowns and the challenges, firms have to take a strategic view and turn this into an opportunity Formal legislative response programs covering legal, operations, business process, IT and Infrastructure is a must have for organizations Solutions need to have the end vision in mind while having the ability to be flexible to handle the current flux and short-term deadlines Building the compliance DNA for your organization
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Questions?
Arun Karur
Global Head of Commodities Practice Sapient Global Markets, Houston
akarur@sapient.com Ph. 713-493-6876

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