OTC Derivatives Reform – Are you ready for centrally cleared swaps?

Brian Dunton, Head of Instrument Engineering, Eagle Investment Systems


One of our clients’ major preoccupations over the last six months has been the implementation of the Dodd-Frank Act and their preparedness for it. We have had a number of inquiries from clients unsure of what they need to do to become compliant with its provisions and looking to us for guidance.

At Eagle we have been preparing for the Dodd-Frank Wall Street Reform and Consumer Protection Act since its initial passage and ensuring we have solutions in place for the inevitable changes that would accompany its implementation. As such we have been perfectly placed to offer guidance and advice on best practices to ensure compliance. We have paid particularly close attention to Title VII, also known as the Wall Street Transparency and Accountability Act of 2010, which provides the overall framework for the regulation of swaps and other derivatives.

Dodd-Frank, along with its European counterpart EMIR (European Market Infrastructure Regulation), requires financial instruments – broadly defined as “swaps” – to be cleared through exchanges or clearing houses.

In addition to the central clearing requirement, the regulatory changes have also pushed forward the use of global, standardized identifiers intended to improve transparency. These identifiers include Legal Entity Identifier (LEI), Unique Swap Identifier (USI), Unique Trade Identifier (UTI) and Unique Product Identifier (UPI). In short, LEI is used to identify each party involved in a financial transaction – including brokers, issuers, counter parties, exchanges, depositories and registered mutual funds – while USIs, UTIs and UPIs are intended to clearly and quickly identify a specific transaction. Adding standardized identifiers provides regulators and internal risk officers with an unprecedented level of access to the previously opaque details of swap transactions.

Eagle has responded to these changes using a multi-pronged approach. We have conducted intensive research and analysis of the new regulations, attended numerous industry events (such as ISDA symposiums) and worked closely with our clients to secure valuable information to develop the new functionality while the requirements were still becoming clear. In April, Eagle released an updated version of our solution – which included functionality to support LEI, USI/UTI, UPI and the ability to book trades and calculate daily variation margin for cleared Interest Rate Swaps (IRS), Credit Default Index Swaps (CDX) and Credit Default Swaps (CDS).

What’s next? Eagle will continue to use the same approach to prioritize the next wave of products for which clearing will be required. We will continue to make sure we are at the forefront of developments in the industry by attending relevant conferences and collaborating with our clients to align with their expectations and stay ahead of the next wave of mandatory clearing.

2 Responses to OTC Derivatives Reform – Are you ready for centrally cleared swaps?
  1. phdodge1

    Hey Brian, this is great. One question came up at a meeting with a prospective client last week related to this. Essentially they asked about currency and total return swaps (while not targeted by current reforms) and if Eagle has considered support for them as well. Thanks!

    • Brian Dunton

      Yes. Eagle has definitely considered these derivatives, along with others, and we have developed the centrally cleared swap functionality with these instruments in mind. We fully expect to see a wide range of instrument types requiring daily variation margin calculations in the near future. Although currency and total return swaps were not included in the first wave of mandatory clearing, the CFTC’s definition of “swap” encompasses many types of derivatives and we expect to see these start to clear through a central clearinghouse (CCP). There is nothing in the language or definitions that would rule out currency and total return swaps as being required to clear. With regard to Total Return Swaps, the only specifics in the definition are related to which agency is responsible for oversight. Total Return Swaps fall into two categories: “Swaps” and “Security-Based Swaps”. The delineation depends upon the number of underlying securities in the basket or index. The CFTC will regulate “swaps” and the SEC will regulate “Security-Based Swaps”. Regardless of which government agency is responsible for oversight, Eagle intends to include these instruments as future candidates for clearing.

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