Lessons learned on Dodd-Frank
For power and utility (P&U) companies, the time to comply with Dodd-Frank regulations is running out. Lessons learned from companies that have already started the process can help ensure preparations are on track. Johnny Molina reports.
With a number of Dodd-Frank regulations already in effect and complete regulations set for implementation later this year, it is not quite panic time for P&U companies but it is getting close.
Organizations must prepare now to ensure compliance with these complex new rules. Lessons learned from the sector’s “early movers,” and from our experience supporting them, can help draw a roadmap for the way forward.
Lesson 1: Understand the complexity
Many P&U companies originally saw Dodd-Frank chiefly as an issue for the financial services industry, or for swap dealers (SDs) and major swap participants (MSPs).
Most now realize that the new regulations will affect them as well because they use over-the-counter derivatives. Dodd-Frank significantly alters the derivatives market, and every company that transacts in this market will be impacted.
However, the complexities and nuances of the new rules, including those around physical transactions, mean that even “early movers” need more time and resources than originally anticipated.
Proper preparation will include:
- Determining how each company will operate under Dodd-Frank
- Building a multidisciplinary implementation team that includes representatives from the business, legal, risk management, finance, IT and accounting departments. It is important to involve the legal team right from the beginning
- Identifying hardware and software requirements to manage and report data to new swap data repositories (SDRs)
- Defining policies and procedures and implementing a control infrastructure to achieve compliance
- Providing formal training to educate commercial personnel on new operating protocols, documentation and deal capture standards for executing swap transactions and dealing with various counterparties
Lesson 2: Implementation timeline varies among the rules
By default, once a final rule is published in the Federal Register, companies have 60 days to comply.
However, for most rules, the timeline is less clear-cut, with nuances, frequent updates and inter-dependencies complicating compliance efforts.
Companies already have obligations under Dodd-Frank and, as more requirements come into effect from April, utilities must realize that all of their operations must now be driven by these obligations and upcoming deadlines.
They must ensure they know exactly what they need to do to comply, that they are in a position to do it, and that they can confidently report back to their Boards regarding the actions taken. It is crucial for companies to have compliance programs that prioritize and manage implementation efforts.
New obligations for P&U companies, most of which are end users in the commodities marketplace, include:
Already in effect: Record-keeping obligations for pre-enactment and transition swaps/historical swaps are already in effect, and end users should be taking appropriate steps to make sure the required records are being maintained.
End users should also have done analysis around “book-out” transactions to support precluding these transactions from the swap definition.
10 April 2013: Additional record-keeping obligations take effect for end users for swaps from this day forward.
10 April 2013: Reporting requirements take effect for end users acting as the reporting party.
1 May 2013: SD/MSP business conduct rules come into effect. These will indirectly impact end users because SDs/MSPs will require updates to existing International Swaps and Derivatives Association or other documentation to incorporate new disclosures and will require counterparty representations.
Late 2013–early 2014: Mandatory clearing and the end-user exception to clearing for commodities swaps is anticipated to take effect.
Lesson 3: Start thinking about data
The new rules will substantially change the way data is captured, stored and ultimately retrieved to meet reporting obligations. Key data and reporting issues include:
- New data fields to capture and record the required unique identifiers on a transactional basis
- Connectivity to one or multiple SDRs
- Linking data to provide an audit trail to enable the reconstruction of each swap transaction
The first step is to understand the capabilities of existing IT systems. Upgrading these systems to ensure compliance is likely to require significant investment, both in new IT systems and in the alteration of existing ones.
With the time for compliance short, we are seeing many P&U companies implementing interim IT solutions while planning for longer-term, more sustainable systems to manage data.
Lesson 4: A good governance structure is a must
P&U companies will need a well-defined program management model. We are working with companies to build new operating models and develop new policies and procedures that will ensure compliance across the transaction life cycle going forward.
This area of Dodd-Frank compliance is particularly time-consuming but essential for successful implementation.
Lesson 5: Additional resources can make a big difference
Many P&U companies will need support to achieve compliance on time and in an efficient and sustainable manner.
We are working with many in the sector to provide both strategic guidance and hands-on support, from initial assessment through to the design and implementation of tailored solutions.
The challenges of Dodd-Frank are considerable, but we can provide companies with a competitive advantage in understanding and implementing compliance.
Read our article Lessons learned from Dodd-Frank implementation.