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The G-20 held its summit in Cannes on managing risk in the global economy in early November. The group of heads of state covered the broad policy and political issues, financial ministers spoke on the difficulty of legislating rules and preventing unintended consequences.
December 13 -
Technology to automatically comply with Dodd-Frank remains in its infancy. To the banks and vendors who develop it first will go the spoils.
July 18
As the banking industry and Wall Street gear up for the impending reforms under Dodd-Frank, it is wise to cast an eye toward the rules for trade reporting and clearing for over-the-counter derivatives, lest they catch you unaware.
The new rules, which will take effect Oct. 16, are intended to help the industry assess and mitigate risk by creating transparency in the OTC derivatives market. However, they present a few challenges, as firms will be obligated to exchange data with trade repositories in a timely manner, raising issues of cost-effectiveness, efficiency and standardization of data transmitted. Like most of the new regulations under Dodd-Frank, this trade reporting and clearing is subject to strict deadlines.
The new rules could also generate hurdles by specifically affecting buy-side and end-user firms. With little upside for these firms to comply, these institutions are in many cases reluctant to conform to the new clearing and reporting rules, forcing one to wonder if they will continue in foreign exchange.
But how will the industry as a whole address these quandaries? Currently, all financial bodies are assessing the impact of the new trade reporting requirements, and if relevant, how to go about reporting most effectively. Institutions struggle to gain clarity, as a move toward transparency in this way is unprecedented in the foreign exchange space. The new reporting will have a great impact on the operations side of businesses, but it remains to be seen whether it might affect trading – and whether it will grow, alter or inhibit the market.
Financial institutions in the United States are not alone in trying to navigate these new regulations, although there are key differences among geographies. For instance, in the United States, single-sided reporting is required, while in Europe, both parties are required to report their trades. Industry consensus seems to be that there will be numerous trade repositories to comply with local regulations across the globe, creating a truly international phenomenon.
One solution for institutions subject to the new rules is the Depository Trust and Clearing Corp.'s global repository – it houses all centralized data on transactions. Another solution for large derivatives market participants is to adopt new technologies in-house, such as FpML, as their standard means for OTC derivatives communications. However, most established firms have little experience with FpML and prefer to leverage existing communications mechanisms.
Fortunately, there are various ways to adapt existing infrastructures to respond to the changing regulatory landscape. For many, it is more beneficial to take advantage of mechanisms that are integral to the fabric of the company and of the financial ecosystem, as a way to achieve compliance and maximize investments in current foundations. In addition to improving standardization in risk management (which reduces costs and complexities and improves efficiencies), utilizing current infrastructures—like SWIFT, my employer—allows for communications to reach multiple trade repositories with a single pipe. What previously seemed like a difficult burden of compliance may actually be a simple matter of reusing your existing tools.
Joe Halberstadt is the head of foreign exchange and derivatives markets at the Society for Worldwide Interbank Financial Telecommunication in London. Previously, he was a senior business analyst and product manager at CLS Services, the largest multi-currency cash settlement system in the foreign exchange market.
