Swaps Regulation

How Swaps Dealers Can Address New OTC Swap Regulation under Dodd-Frank

As the rules pertaining to swap dealer registration under Title VII of the Dodd-Frank Wall Street Reform Act (“Dodd-Frank”) are now finalized, swap dealers (SDs) and major swap participants (MSPs) are now required to register with the SEC and/or the CFTC to continue trading on behalf of “US persons” (i.e. US-based clients).  This has effectively spurred many of the large brokerdealers active in OTC swaps trading to make complex changes to their operations and technology to comply with the rules.  Across Wall Street, Monticello Consulting is seeing its investment banking clients undertake time-critical projects in order to make significant changes to both their business processes and technology platforms in order to comply with Dodd-Frank rules.

Important decisions we see senior banking leaders grapple with in this new regulatory environment include:

  • New Capital and margin implications for swap dealers, as set forth in Dodd-Frank, and how that affects dealer profitability and the ability to attract new business while retaining existing clients
  • Which entity swap clients will face, communicating the new strategy to its clients, and the novation challenges facing existing client inventory
  • How to internally hedge market risk and still be in compliance with the regulations

During 2012 Monticello Consulting has been assisting an active swap dealer to implement similar changes for its US-based prime brokerage clients.  Prior to Dodd-Frank, US prime brokerage clients were trading with an international broker–dealer entity, which housed other businesses across multiple asset classes.  In order to comply with Dodd-Frank, the dealer decided to novate US clients to a different entity that had been newly registered as a swaps dealer, while allowing its international clients to continue trading with the legacy broker-dealer.

Subsequent to entity registration as a swaps dealer, our client’s trading platform and systems had to be enhanced to support US clients trading the targeted OTC swap products.  As a result, Monticello Consulting coordinated the development of the new infrastructure and managed the user acceptance testing with traders and all support and control partners including middle office, finance, and operations.  The development included enhancements to the trade capture systems, profit and loss reporting tools, settlements and operations systems, reconciliations, and ledger systems. 

Once the technology solution was arranged, Monticello Consulting structured a plan with sales and trading, business management, and client services reps to novate clients to the target entity and migrate legacy positions.  New rules such as capital requirements and collateral management had to be addressed, along with tax implications for US clients facing the new entity.

New rules such as capital requirements and collateral management had to be addressed, along with tax implications for US clients facing the new entity.  The structured plan allowed the dealer to meet the regulatory deadline, and the solution did not require clients to post additional collateral while maintaining important client benefits such as cross-margining. To learn more about how Monticello Consulting Group is assisting Wall Street firms in complying with Dodd-Frank Regulatory Reform, please Contact Us today.