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CFTC Trade Reconstruction Requirements Drive Nearly 9 in 10 Compliance Executives to Seek Outside Help

June 11, 2014

The Commodity Futures Trade Commission (“CFTC”), as mandated by the Dodd Frank Act, has imposed sweeping regulatory requirements on Swap Dealers. One of the most significant challenges for these firms relates to trade reconstruction and the complex CFTC record-keeping requirements.

“Trade reconstruction requirements have created a broad industry record-keeping challenge that has not yet been tested, leaving industry participants to guess how the requirements will be enforced,” says Harald Collet, Global Business Manager for Bloomberg Vault. “Recreating the entire life-cycle of a swap – along with all of the data requirements of the regulation – is a daunting proposition for most firms.”

It is against this backdrop that Bloomberg Vault and Compliance Risk Concepts (CRC) hosted a special roundtable at Bloomberg’s New York headquarters last week attended by senior compliance executives at financial firms representing nearly 10 percent of institutional investment firms affected by these regulatory requirements.

An unofficial survey taken during the event found that only 7 percent of attendees felt confident they were ready to meet the CFTC’s trade reconstruction requirements.

Record-keeping mandates detailed in CFTC Reg 1.35(a) require firms to produce a time-sequenced reconstruction of a swap trade. Tagging, organizing, managing and exporting data from the life-cycle of a swap trade – from pre-trade, to execution to post-trade – is an arduous task because so many different types of structured and unstructured data are part of the data aggregation and tagging process. To satisfy a CFTC inquiry, firms need to maintain daily trading records of swaps (including related cash and forward transactions) and all related communications, such as electronic mail, instant messages, and recorded phone calls, which can pose a significant challenge for most firms.

Harald Collet, Global Business Manager for Bloomberg Vault at the DFA Trade Reconstruction Roundtable

Harald Collet, Global Business Manager for Bloomberg Vault at the DFA Trade Reconstruction Roundtable

Survey results suggest compliance struggles most with organizing pre-trade data

The survey from the Bloomberg Vault-CRC event found that 100 percent of participants considered pre-trade to be the hardest part of the trading workflow to address for trade reconstruction purposes.

Moreover, 100 percent of participants indicated that searchability and tagging unstructured data with trade and LEI identifiers were the most challenging aspects of the pre-trade workflow.

Seventy-nine percent voted that the technology and system integration process underlying trade reconstruction was the biggest global challenge they will face complying with the new mandates.

“Reconstructing swap trades accurately is a significant undertaking that requires collaboration from internal compliance, technology, risk and audit departments,” said Harald Collet, adding, “implementing an external technology vendor can assist compliance and risk executives with this daunting task – and 85 percent of participants in last week’s roundtable indicated they lean on an outside vendor to support some aspects of the trade reconstruction process.”

Earlier this year, Harald Collet was interviewed about how Bloomberg’s managed information compliance and data discovery service helps clients organize various communication types, such as recorded voice data, into an easily searchable environment to support trade reconstruction demands.