Derivatives regulations are spurring industry-wide efforts on collateral and counterparty risk management.
“The increased use of collateral due to clearing makes it imperative that firms optimize the use of their collateral assets,” said Raf Pritchard, chief executive of triResolve, a counterparty exposure management service. “Accurate and timely reconciliation of exposures is crucial to avoid collateral disputes.”
In the U.S., the final Commodity Futures Trading Commission (CFTC) rules on portfolio reconciliation have been published in the Federal Register, which require regular portfolio reconciliation and timely resolution of identified discrepancies in valuations and material terms.
In Europe, the proposed European Market Infrastructure Regulation regulation also requires regular portfolio reconciliation and resilient processes to identify and resolve disputes.
“Although dealers and many buy-side firms have been reconciling portfolios and exposures as best practice for several years now, more and more firms are looking for a transparent and automated reconciliation process,” Pritchard said.
The CFTC has designated the Depository Trust & Clearing Corporation (DTCC), the post-trade group, and Swift, an industry-owned co-operative that provides a secure electronic messaging system between banks, as the provider of the legal entity identifiers (LEIs), which will be used by registered entities and swap counterparties in complying with the CFTC’s swap data reporting regulations.
LEIs, to be known as CFTC Interim Compliant Identifiers, or CICIs, until establishment of a global LEI system, are essential tools for aggregation of derivatives data.
“The CICI implementation needs to be understood in the context of a broader development of LEIs,” said William Hodash, managing director of business development at DTCC, at the meeting of the International Swaps and Derivatives Association (ISDA) in New York last week.
The move is the latest in a series of actions to create a global system by which the CFTC and other financial regulators can use swap data to monitor and mitigate systemic risk and promote market transparency, both key objectives of the G20 financial reforms.
The CICI is designed to be an identifier for all legal entities dealing in OTC derivatives falling under CFTC jurisdiction until an international program for a LEI is launched, which is expected by March 2013.
DTCC and Swift are also working with the Association of National Numbering Agencies (Anna) to incorporate National Numbering Agencies as federated registration and validation facilities.
A federated operating model has been recommended by the Financial Stability Board (FSB), the G20’s regulator, to the G20 group of nations.
“The objective of LEI is to tie together reporting across assets, geographies and counterparties,” Hodash said. “While the CFTC appointed DTCC and Swift to provide CICI, DTCC continues to work with the FSB on global LEI.”
The CFTC order designates DTCC-Swift as the provider of the CICIs to be used in recordkeeping and swap data reporting pursuant to parts 45 and 46 of the Commission’s regulations. This designation is made for a limited term of two years.
Firms involved in the OTC credit and interest rate derivatives markets can register for and be assigned an identifier using DTCC and Swift’s system prior to the effective date of the CFTC transaction reporting and recordkeeping rule.
