Dodd-Frank legislation: “Reporting and Recordkeeping”

Portions of the 2009 Dodd-Frank Wall Street Reform and Consumer Protection Act were to establish regulations governing the users of derivative products. In the energy industry this generally applies to the use of derivative products used to hedge pricing risk through the use of swaps. Recently, the Commodity Futures Trading Commission (CFTC) published "Swap data recordkeeping and reporting requirements" which details the application of new regulation to dealers and users of these financial tools.1

Who is affected by the rules

All parties who are involved in swap transactions are affected, with degree determined by type of organization and level of involvement in the swap transaction. In general, the primary burden of reporting is placed upon swap dealers and major swap participants. To qualify as an end user (non-swap dealers and non-major swap participants) an entity cannot be a swap dealer or major swap participant.

As for recordkeeping, all parties participating in the swap transactions are required to keep full, complete, and systematic records, together with all pertinent data and memoranda, of all activities relating to the business of the party with respect to swaps. Retention requirements are covered in the "Rules Discussion" section below. Swaps entered into and were open on July 21, 2010 and swaps entered into after July 21, 2010 must comply with the recordkeeping requirements. End users should be able to rely on the swap dealer and major swap participant counterparties to do the required reporting. But if the parties are two end users then they should include as part of their agreement which party will be responsible for the reporting.

Generally speaking, end users are provided more lenient rules than their counterparts, and receive extended grace in compliance from the initial date or ruling. Per the compliance schedule released in the rules, initial compliance for end users will be six months after the rules are effective.

De Minimis Exclusion2

The initial de minimis amount for analyzing whether an entity or person is a swap dealer is the following:

  • An effective notional value of $8 billion per year for CFTC-regulated swaps and for security based swaps that are credit default swaps;
  • $400 million for other security based swaps;
  • $25 million3 for swap dealing with special entities (e.g., municipalities, endowments, and employee benefit plans)

Unlike the proposed rules, the final rules do not impose a limit on the number of swaps an entity can enter or the number of an entity's swap counterparties. A swap does not count against the de minimis threshold if it:

  • Is not connected to dealing activity
  • Is entered into with an entity's majority-owned affiliates;
  • Is entered into by an insured depository institution in connection with the origination of loans to customers, subject to conditions (in the case of CFTC-regulated swaps); or
  • Qualifies for hedging exclusions under the Commissions’ guidelines.

Rules discussion

Reporting and recordkeeping requirements are fairly uniform for all entity types involved in swap transactions. Overall, the rules will have greater affect on the reporting party (as indicated in the bullets), and generally provide decreased requirements for end user counterparties, including areas of interest as described in the following:

  • Recordkeeping: Records must be kept for the life of the swap, plus an additional five years. Records must be electronic in nature and retrievable upon request by the Commission within three (3) days, unless the entity is an end user counterparty in which case the records can be paper and retrievable within five (5) days. Records are open to inspection by the Commission.
  • Reporting timing and content: A swap executed electronically must be submitted "as soon as technologically practicable" which can be defined as under 30 minutes, decreasing to under 15 minutes after execution after year one of the rules taking effect. Swaps executed in paper form must be submitted by the end of the second business day, decreasing to by the end of the first business day (day of) after year one.

    Swap documentation submitted must include the confirmation data and all primary economic terms, however items unrelated to these two areas which are incomplete should not prevent submission of the swap to a swap data repository (SDR). All swap data must be reported to a single SDR, including continuation data and voluntary supplemental reporting.

    Identifiers also play a key role in the swap reporting process. Three primary identifiers in the ruling are: Unique swap identifier (USI), unique counterparty identifier (UCI), and unique product identifier (UPI). While the counterparty identifier is generated by the Commission, the swap and product identifiers are generated by the swap participants, with the responsibility borne by the reporting party/counterparty or if not, as defined in the swap agreement. Identifiers are discussed in the rules.
  • Continuation reporting: In certain circumstances, continuation reporting may be required by a party, with circumstances including: life cycle events affecting the nature of the swap, changes in the valuation, and continuation data for swaps which have not cleared yet.
  • Which party should report: Typically, the reporting party is the one which has the "easiest, fastest, and cheapest" means of reporting. In cases where a financial entity is involved in the swap, they will bear the responsibility for reporting unless otherwise defined. If a financial entity is not involved, the swap dealer/major swap participant counterparty will be charged with reporting. End user counterparties are not primary bearers of responsibility in reporting, unless both parties are such, in which case the requirement to report should be defined in the agreement. The rules issued extensively cover applicable scenarios where both companies are end user counterparties. Utilizing a third party for reporting is allowable under the rules.
  • Voluntary reporting: Encouraged by the Commission, but communication must be clearly defined as voluntary in nature. Must be submitted to the same SDR as other communications.
  • Data formatting standards: The ruling discusses data standards, with SDR’s being indicated as being able to accept multiple formats of data. However, once a format for submission has been determined, future submissions must be in the same format.
  • Error reporting: Reporting registered entities or swap counterparties are directed to report errors or omissions as soon as technologically practicable. End user counterparties discovering errors or omission should also report these as soon as technologically practicable. Errors, omissions, or corrections should be reported in the same format as the data which contained the original error, omission, or correction.

In summary, while there are many new rules for the reporting and recordkeeping of swap transactions, the primary burden of reporting responsibility will be borne by the reporting party, reducing unnecessary burden on end user counterparties. Adequate records should still be maintained at all times regarding swap transactions, and current compliance with GASB 53 should facilitate a smooth transition to these new rules.

Note: A list of registered entities was not available as of the date of the report. An update will be provided when such data is available.

1 17 CFR Part 45, "Swap Data Recordkeeping and Reporting Requirements" (Dodd-Frank)
2 17 CFR Part 1, "Further Definition of Swap Dealer, Security-Based Swap Dealer, Major Swap Participant and Eligible Contract Participant" (Dodd-Frank)
3 Rules related to this threshold are currently pending per a petition filed by the APPA
 
Supplemental reading: 17 CFR Part 43 – Real-Time Public Reporting of Swap Transaction Data

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