Sid Jacobson, partner, SunGard Global Services’ energy and utilities business offers ten items end users need to be proactive about to prepare for regulatory compliance
On Monday August 12, 2012 when the US Commodity Futures Trading Commission (CFTC) entered the definition of a swap, the clock started ticking for all energy and commodities market participants to be prepared for forthcoming compliance dates. There are only 60-240 days to achieve compliance depending on the rule and the company’s role in the swaps market.
For producers, marketers, traders or commodity end-users, the Dodd-Frank Act (DFA) will change business. Although there are many who believe that by not registering as a swap dealer or major swap participant (essentially meaning the “end-user”), DFA compliance activities will be limited. There is still a long list of compliance activities that need to occur, and a parallel list of rule comprehension that relates to many energy and commodities customers and counterparties – each rule highly dependent on data and information.
Particularly, a swap end user should be proactively assuring 10 things. They should:
1) Ensure that swap transaction activities are regularly tested against definitions and thresholds of a swap dealer and major swap participant and they are documenting results
2) Be able to identify, label and document hedge exemptions for all transactions that may fall under the definition of a swap, including the often overlooked embedded option in a physical contract
3) Be equipped to quickly aggregate swap transactions across the parent entity and its divisions
4) Aggregate and monitor position limits daily and intraday
5) Calculate potential collateral requirements for swap transactions that will not qualify for a clearing exemption
6) Amend ISDA and other master agreements to reflect new Dodd-Frank Act rules, inclusive of identifying a reporting party to comply with real-time reporting requirements
7) Modify their approach to transaction execution with capital review of counterparties and dealers and evaluating the viability of alternative transactions such as futures and physical contracts
8) Identify which swaps will migrate from over-the-counter brokered negotiations to an electronic SEF or through a DCM
9) Ensure that real-time communications and data interfaces with SEFs, DCMs, and SDRs are in place for transaction and compliance reporting
10) Be sure that data for periodic CFTC reports are easily accessible, stored and retrievable for up to five years after the transactions’ settlement or expiration
While there may be a belief that compliance requirements can be reduced by reevaluating trade execution, or designating a counterparty as a reporting entity and transacting through the SDR via their clearing and uploading mechanism, the burden of proving compliance still rests on the transacting entity itself.
We as an industry do not know what new rule changes, liquidity impacts and data requests are coming down the road. Being prepared will require ownership of the process, data and information needed for compliance.
