With regulation requirements mounting across the capital market landscape, it is easy to get confused as to what is relevant to your firm. When it comes to trade reconstruction requirements, the SEC’s Dodd-Frank Act of 2010 and the European Union’s MiFiD II of 2018 constitute the two leading regulatory mandates for firms trading in swaps – the agreement between two parties to exchange sequences of cash flows for a set period of time.
Here at VoxSmart we have broken down these requirements in simple English, no frills just facts! Don’t get left behind when it comes to safeguarding against hefty penalties.
AMAR – Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, brought in under the Obama administration dictates that firms dealing in swap products must, within 72 hours of request, produce a time sequenced reconstruction of swap trades. This spans the pre-trade communications to the swap expiration stages.
As mentioned, this requirement impacts all swap products, and requires records of the trade to be store for the duration of the swap plus five additional years thereafter. Furthermore, non-transactional records including oral and written communication must be stored for five years.
This act was brought in to enhance the CFTC’s regulatory authority to oversee the more than $400 trillion swaps market, putting an end to the institutions deemed “too-big-to-fail” and prevent another financial crisis.
Some of the key components of the Dodd Frank Act include the Financial Stability Oversight Council (FSOC), the Volker Rule to restrict certain investment strategies, the Consumer Financial Protection Bureau to prevent predatory mortgage lending, the SEC Office of credit ratings and a whistleblowing scheme. Arguably one of the most resource intensive rules was Title VII, which imposed new registration requirements and increased reporting requirements, granting the CFTC authority over swaps, apart from security-based swaps, which are regulated by the SEC.
EMEA – MiFiD II
MiFID II entered into force on 3 January 2018 and was established to strengthen investor protection and improve the functioning of financial markets making them more efficient, resilient and transparent.
In a similar vein to the Dodd-Frank Act, MiFiD II requires firms to accurately reconstruct the lifecycle of a trade including all services, activities and transactions. This regulation encompasses all OTC products in addition to exchange traded products. Communication records must be stored for five years, and in some cases as long as seven years, on a tamperproof storage medium that is searchable.
Although there is no given timeframe for submission of audit request, however, records should be readily accessible based on the type of transaction involved.
Currently there is no specific regulation for APAC regions that requires the reconstruction of trades however, if a firm has a US/EU nexus then this will automatically bring a firm under the regulatory requirements of these regions. Therefore, should an audit be called by the CFTC or ESMA firms within the region must be able to provide trade reconstructions or risk financial penalty and reputational damage.
With regulation requirements within the region edging towards alignment with US or European standards, firms adopting to an automated trade reconstruction system are better positioned for future regulatory requirements in addition to safeguarding against potential audits under Dodd-Frank Act or MiFiD II.
VoxSmart’s award-winning Trade Reconstruction solution not only provides firms with the security of being regulator ready but also equips them with a powerful analysis resource, bespoke and tailored to their specific needs.
Get in touch with a member of our team today to learn how our Automate Trade Reconstruction solution can help your firm today!
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