Content: Market Pressure
Helping a Global Bank Respond to a Regulator’s Audit.
Following the 2008 global financial crisis, policymakers in the G-20 committed to reforming domestic and international rules governing the over-the-counter (OTC) derivatives markets. In response, regulators across the world like CFTC, ESMA, MAS, ASIC, etc have come up with various regulations like central clearing through central counterparties to reduce counterparty risk and reporting of all eligible transactions to trade repositories to increase transparency. Firms are expected to comply with complex regulations constantly and may be subject to severe financial penalties and reputational risk in case of any deficiencies observed by the regulators.
A Global Bank that is a Swaps Dealer responded to a regulator’s audit of its OTC Trade Reporting by engaging Risk Focus to perform a Regulatory Trade Reporting Health Check.
Ever since the enactment of Dodd Frank in the US and similar regulations like EMIR in Europe, regulators have continued to monitor the data quality of trade submissions and provided additional guidance to trade repositories like the DTCC’s Global Trade Repository (GTR) in a bid to make the submission data more useful for their oversight. For example, EMIR reporting for OTC derivatives began in February 2014. ESMA Level 1 validations were rolled out in December 2014 and subsequently ESMA Level 2 validations in November 2015 requiring trade repositories to strictly enforce them and reject any submissions made by firms that did not comply with these. Hence, firms need to continuously monitor any changes to the regulations and subsequent impact on the message submission specifications provided by the trade repositories to remain complaint.
Regulators and their enforcement arms regularly perform audits to measure compliance with these regulations, and are most interested in seeing evidence that firms are in control of their trade reporting operations. Firms that can prove that they can retrieve historical reports with little effort and have mechanisms to ensure the quality, accuracy, and completeness of their reports will fare better than firms that can’t. Those that are found to be remiss or to have inaccurately reported their trades to a repository have been both fined millions of dollars and exposed in the media.
Our client, a large Global Bank that is a Swaps Dealer, was being audited by one of the enforcement arms of a regulator. The bank engaged Risk Focus to perform Regulatory Health Check to identify gaps in its reporting obligations to CFTC and ESMA for their Interest Rates, Foreign Exchange and Commodities businesses. Within 6 weeks the Risk Focus team was able to perform a detailed review of the current workflow for various products and trade life cycle events as well as analysed several samples of the firm’s submissions to the trade repositories. Accomplishing this in such a compressed time frame was made possible by leveraging the regulatory reporting controls from RegTek Solutions, the software firm spun out of Risk Focus in 2017. The team identified gaps in the firm’s current reporting workflow and data quality issues with the submissions. At the end of the engagement, the team provided high-level recommendations to the client on how to address deficiencies like under-reporting and over-reporting of certain events and erroneous/missing/incorrect reporting of certain fields to the regulators.
The high-level approach followed during the engagement is as follows:
– Review of current reporting workflow for various asset classes and products
– Identification of trade life cycle event reporting scenarios for each of the asset classes and products in scope
– Comprehensive analysis of a sample subset of the firm’s submissions to the trade repository by performing a manual three-way comparison between the firm’s submissions, trade repository specifications and the regulations as well as using RegTek’s industry acclaimed tool Validate.Trade
– Documentation of gaps and issues identified during the analysis and providing recommendations to the client to effectively address the shortcomings
Based on the high-level recommendations provided by the Risk Focus team at the end of the regulatory health check engagement, the client is embarking on a remediation program that follows our suggestions, which includes putting in place a new layer of controls alongside their transaction reporting platform, essentially future-proofing them from changes in regulations going forward by implementing a foundational control framework.
The remediation program based on the Health check findings will include the following:
– Implementing a control framework (from RegTek Solutions) for daily reconciliation of trading activity against trade repository reporting activity, as well as monitoring errors in real time
– Addressing the gaps in existing reporting workflows
– Back-reporting of any under reported/mis-reported trades