Dodd-Frank New Client Data Requirements

Among the lesser known components of Title VII of the Dodd-Frank Act are the internal and external business conduct requirements.  Included in these requirements is the mandate for swap dealers (SD) to obtain and maintain more information on their clients than most have in the past. This additional requirement is meant to provide the Swap Dealer the data necessary to perform both a “know your customer” exercise, determine institutional suitability, eligibility as a contract participant and legal status.

In order to supervise these new rules the Dodd-Frank Act has also added a number of layers of new regulators.  Since the responsibilities of the Swap Dealer have greatly increased, it is important that the SD is prepared for these responsibilities and able to substantiate to the regulators their adherence to these regulations.  Since the rules are new and there has been limited guidance by the regulating bodies on many of the specifics, swap dealers should be prepared for more aggressive reviews.  Besides having the necessary policies and procedures that outline the processes that must be followed, the dealers must include supervisory procedures and equally as important, substantiate to the regulators the adherence to these procedures, the transmission of the required disclosures (especially for non-swap and special entities) and the affirmation of the receipt and understanding of these disclosures by the counterparty.

These new requirements have become another burden to those trying to onboard a counterparty onto a Capital Markets platform.  Currently, the process for most capital markets organizations already entails KYC and AML reviews for existing SEC and Patriot Act requirements, a credit review to ensure the financial viability of the counterparty and to determine collateral requirements, and a legal process that leads to the execution of the appropriate ISDA master agreements.

The utilization of technology such as BPM (Business Process Management) platforms to automate the onboarding process has already been implemented by a number of capital markets organizations.  This automation has helped these organizations improve the efficiency of the process which can be a roadblock when trying to onboard a client anxious to enter into a transaction.  Since the need to enter into a transaction can be time sensitive and the pre-trade process can be time-consuming, automated solutions have become even more critical.

The need for enhancing or developing new solutions to automate the existing processing needs coupled with the new requirements for client information, suitability, legal status and eligibility has created an increased need to explore a wide range of technology including traditional BPM but also Enterprise Content Management (ECM),  Master Data Management (MDM) and others.  Document retention and the consolidation and normalization of client data sometimes across a vast number of silos has become even more important as dealers begin to examine what is now being asked of them.  It is important to consider these regulatory changes not as static but to consider how to make the organization more nimble and customer-centric going forward.

Consideration of the scalability and ability to adapt to futures changes is more important now than ever before.  The speed of regulatory change has increased and the lack of clarity in many areas has created a greater need for the solutions to remain nimble.  It is assumed that clarity will increase over time so that the changes that are being implemented now may need to be adjusted as time goes on.  However, the need to respond to change is upon us and the regulators, customers and shareholders will be waiting to see how each organization responds to these changes.  The winners will be the organizations that lead the way in this process and not only adapt to changes today but can navigate the changes that will surely follow.