US energy firms facing Dodd-Frank trade reporting ‘nightmare’

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Dodd-Frank reporting has become a scary prospect, firms say

Energy firms are slogging through a frustrating, time-consuming mess as they struggle to ensure compliance with Dodd-Frank trade reporting rules crafted by the US Commodity Futures Trading Commission (CFTC).

The problem, according to industry compliance specialists, lies in the lack of shared standards between the three swap data repositories (SDRs) to which energy companies and other market participants must report their over-the-counter commodity derivatives trades. Because of inconsistencies between the SDRs, energy firms have been engaged in a labour-intensive, manual process to ensure that when they do a trade with a counterparty, the record of the trade in the SDR matches the record held by the company itself.

"The reconciliation process has been quite a nightmare for the industry. That's been the common theme whenever you speak to industry players," says Zarin Imam, Houston-based managing director of gas logistics and special projects at Iberdrola Energy Services, the US natural gas trading unit of Spanish energy giant Iberdrola.

Following months of industry complaints, the CFTC has recently swung into action. On January 21, the commission formed a working group to look into the trade reporting difficulties, and the issue is set to be discussed at a meeting of the CFTC's Technology Advisory Committee on February 10. CFTC officials have admitted the lack of harmonisation between the SDRs and misreporting of trades threatens their ability to oversee OTC derivatives.

"In order for the commission to enforce the significant Dodd-Frank reforms, the agency must have accurate data and a clear picture of activity in the marketplace," CFTC acting chairman Mark Wetjen said in a January 21 statement announcing the formation of the working group. The CFTC declined to comment for this article.

The reconciliation process has been quite a nightmare for the industry

SDRs are essentially giant data warehouses for storing information about swap trades. While the CFTC set up a process for registering SDRs and devised certain standards for how they should be run, it did not spell out the data that each one must collect, leaving it up to each SDR to decide for itself.

Three companies have set up SDRs: Chicago-based CME Group, with its CME Swap Data Repository; the New York-based Depository Trust & Clearing Corporation (DTCC), with its DTCC Data Repository; and Atlanta-based Ice, with its Ice Trade Vault.

Ice Trade Vault has more than 700 participants and commodity and energy end-users make up the majority of these, according to the company. “Our repository offering is geared towards this end-user segment,” notes Bruce Tupper, Atlanta-based president of Ice Trade Vault.

In contrast, DTCC Data Repository has been more popular among banks, which own shares in its parent company and already use the DTCC for post-trade services in other areas of the financial markets.

Iberdrola, like many other end-users, uses Ice as its preferred SDR. That poses a challenge when Iberdrola enters into a transaction with a bank, and the bank – as a registered swap dealer – reports the transaction to the DTCC on Iberdrola's behalf. To reconcile its trades, Iberdrola must then log into the DTCC’s system, look up the transaction the bank reported and match that transaction to Iberdrola's internal records. "It's quite a laborious process," Imam says.

Compounding the headaches for energy companies, the DTCC and Ice have taken different approaches to the data they require from market participants. While the DTCC offers many different ways to report the same type of transaction, Ice typically offers only one way to report the transaction, industry sources say. Especially where transactions are more complex, there can be many ways to report them to the DTCC, and the end-user may have a different interpretation from its bank counterparty.

"Almost every market participant I work with has told me about instances where the transactions being reported on their behalf are being reported differently from the way they look at the transactions," says Sid Jacobson, a Houston-based partner at SunGard Global Services. "For example, an end-user might enter into a calendar-year swap with a bank or a swap dealer, and the swap dealer will choose to report it as a series of 12 transactions, as opposed to a flat price, full-year transaction."

All of that makes it difficult for the end-user to find the transaction in the DTCC and reconcile it with their own records, says Carrie Slagle, a Houston-based director with consulting firm Sirius Solutions, who specialises in end-user reporting issues.

"It's pretty difficult to reconcile to the DTCC," Slagle says. "One swap dealer might have reported the same type of swap using different data sets than another swap dealer did. So if you're the non-reporting party and you're trying to tie all that together, it's nearly an impossible task."

According to Slagle, one of the main burdens for end-users involves so-called ‘historical swaps' – swaps that were active between July 21, 2010, when Dodd-Frank came into force, and April 10, 2013, when the CFTC's real-time reporting rule took effect for end-users. As the reporting regime was phased in over the course of 2013, market participants were expected not just to report all of their new swap trades going forward, but their historical swaps as well.

"People are going back and doing a trade-by-trade reconciliation in some cases," Slagle says. "They had a tremendous number of historical swaps that they had to report last year... Many people were rushed to get their historical swaps reported, so they're going back and reconciling them."

Imam says her biggest concern is whether all of Iberdrola's historical swaps were properly reported by other counterparties to SDRs. In some cases, Iberdrola identified missing transactions that should have been reported by the firm's counterparty. "If we had 100 deals that we were looking for, sometimes we found that the reporting party submitted only 90," Imam says. "So our next step was to contact the reporting party and investigate."

The most sensitive question for end-users is whether the CFTC might initiate an enforcement action against them over trades that were not properly reported by a counterparty. "There's a lack of clarity in what the expectations are around accountability for someone else reporting your information," says a senior risk manager at a major US energy company. "As a matter of proper due diligence, it's important to understand and reconcile with the SDRs what has been reported on your behalf. But where there are differences, what can you do about it? I mean, you're not the reporting entity. Is there liability? If it's material, what are the implications? I don't think it's clear to most of the end-users."

The DTCC would not make any of its representatives available for an interview. It said in a statement that it "remains committed to actively working with its client base to understand the challenges they are facing" and that it is "evaluating enhancements to help clients gain better access to and retrieve information more seamlessly”.

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