VIDEO: Internal Compliance Under Dodd-Frank and EMIR
Matt Hoffman of Chatham Financial answers your questions such as “What regulatory compliance obligations might my banks not help me with?”, and others regarding Dodd-Frank, EMIR regulations, and, in particular, the ISDA Dodd-Frank Protocols. Thanks for watching!
Matthew Hoffman: When Dodd-Frank and EMIR first came online, we found that the buy-side of the over the counter market was concerned with continued access to that market asking us questions like, “What do I have to do for my banks to continue to trade with me?” This question really amounts to what do my banks need me to do so they are compliant with Dodd-Frank and EMIR and while these indirect compliance obligations are important in terms of continued access to the OTC market, we focused on ensuring that our end-user clients are meeting their own internal compliance obligations under Dodd-Frank and EMIR, internal compliance obligations that banks cannot handle for them.
While banks simply require these companies to make certain representations typically through ISDA’s Dodd-Frank Protocol 2.0, SEC filers boards were required to authorize a committee to review and approve the decision to enter into derivatives as well as to put a risk management policy in place and review it annually or more often upon a triggering event.
More generally, both Dodd-Frank and EMIR require derivatives end-users to have certain policies and procedures in place. And while banks simply are required to receive certain representations to that effect, internal auditors or even national derivatives regulators may look more closely to ensure that end users are complying with regulations in related representations. For example, on the Dodd-Frank side, US swap dealers typically require end-user parties to adhere to ISDA’s Dodd-Frank Protocol 1.0 and in so doing to make institutional suitability representations by electing schedule 3 from the DF supplement. But many end-users fail to realize that this election amounts to a representation, that certain written policies and procedures are in place.
On the EMIR side, end-users are required to have policies and procedures in place on account of direct risk mitigation compliance obligations including timely confirmations, portfolio reconciliation, dispute resolution and valuations. But banks typically only focus on portfolio reconciliation documentation rather than ensuring that end-user’s policies are drafted appropriately or even exist.
Another often overlooked element of internal compliance relates to record keeping. While banks typically report transaction data under Dodd-Frank, the regulations actually require end-users to keep full, complete and systematic records together with all pertinent data and memoranda with respect to each swap in which they’re a counterparty. As the system of record for many of our clients, we’re confident that our clients can meet the regulatory requirement that such data be accessible within 5 days at any time during the life of the trade and for 5 years thereafter.