Dodd-Frank Wall Street Reform and Consumer Protection Act
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Signed into law on July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act is the most aggressive attempt to reform the financial services sector since the New Deal reforms that were enacted in the wake of the Great Depression. The primary goal of the Act is to impose and strengthen business conduct standards on Wall Street. The Act created three new agencies1, eliminated another2, and modified the powers and duties of most of the existing financial services regulatory agencies. Many of these agencies are either required, or have the power, to issue new rules and regulations to enforce the Act, including instituting new reporting and recordkeeping requirements. The Commodity Futures Trading Commission (CFTC), and to a lesser extent the Securities and Exchange Commission (SEC), are responsible for the bulk of the rulemaking required to implement the provision of Dodd-Frank. The CFTC has been given regulatory authority over swaps, while the SEC has the authority to regulate security-based swaps. Although still in its infancy, the newly created Bureau of Consumer Financial Protection (CFPB) has broad jurisdiction over the entire consumer financial services spectrum and extensive rulemaking authority.
Definitions have played a major role in the transformation of the provisions of the Dodd-Frank Act from legislation to regulation, as the Act requires the rulemaking agencies to issue final rules to further define certain key terms, including (among others) "swap," "swap dealer" and "major swap participant." In certain cases, the dates upon which organizations must be in compliance with new rules are tied to the finalization of these definitions.
The regulated definition of the term swap is extremely detailed and complex, but in general terms, a swap is a contract to exchange streams of payments over time according to specified terms. It includes concepts such as foreign exchange swaps and forwards, foreign currency options, commodity options, cross-currency swaps, and forward rate agreements. Excluded from the final definition of a swap are forward contracts of a non-financial commodity that are intended to be physically settled, certain insurance products and some consumer and commercial transactions.3
Security-based swaps which are regulated by the SEC are broadly defined as swaps based on:
i. A single security,
ii. A loan,
iii. A narrowly-based group or index of securities, or
iv. Events relating to a single issuer or issuers of securities in a narrow-based security index.4
The CFTC has defined the term "swap dealer" to mean any person who:
i. Holds itself out as a dealer in swaps,
ii. Makes a market in swaps,
iii. Regularly enters into swaps with counterparties as an ordinary course of business for its own account, or
iv. Engages in activity causing itself to be commonly known in the trade as a dealer or market maker in swaps.
The final rule excludes any person who enters into swaps for such person’s own account, either individually or in a fiduciary capacity, but not as a part of a regular business.5
Swap Data Repository
Swap Data Repositories are a new class of registered entity that was created by the Dodd-Frank Act. As defined in the Act, the term ‘‘swap data repository" means any person who collects and maintains information or records with respect to transactions or positions in, or the terms and conditions of, swaps entered into by third parties for the purpose of providing a centralized recordkeeping facility for swaps.
Major Swap Participant
A "major swap participant" is a person that satisfies any one of the following criteria:
i. A person who maintains a "substantial position" in any of the major swap categories, excluding positions held for hedging or mitigating commercial risk and positions maintained by certain employee benefit plans for hedging or mitigating risks in the operation of the plan.
ii. A person whose outstanding swaps create "substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets."
iii. Any "financial entity" that is highly leveraged relative to the amount of capital such entity holds and that is not subject to capital requirements established by an appro- priate Federal banking agency and that maintains a "substantial position" in any of the major swap categories.6
Derivatives Clearing Organization
The term "derivatives clearing organization" means a clearinghouse, clearing association, clearing corporation, or similar entity, facility, system, or organization that, with respect to an agreement, contract, or transaction—
i. Enables each party to the agreement, contract, or transaction to substitute, through novation7 or other- wise, the credit of the derivatives clearing organization for the credit of the parties;
ii. Arranges or provides, on a multilateral basis, for the settlement or netting of obligations resulting from such agreements, contracts, or transactions executed by participants in the derivatives clearing organization; or
iii. Otherwise provides clearing services or arrangements that mutualize or transfer among participants in the derivatives clearing organization the credit risk arising from such agreements, contracts, or transactions executed by the participants.8
Designated Contract Market
Designated contract markets are boards of trade or exchanges that operate under the regulatory oversight of the CFTC. They are most like traditional futures exchanges, which may allow access to their facilities by all types of traders, including retail customers.9
Record Keeping Requirements
The most significant new recordkeeping requirements issued thus far govern swaps. New rules require swap execution facilities, designated contract markets, derivatives clearing organizations, swap dealers, and major swap participants to keep full, complete, and systematic records, together with all pertinent data and memoranda, of all activities relating to the business of such entity or person with respect to swaps, for a period of at least five years following the final termination of the swap.10
Swap dealers and/or major swap participants must keep records for a period of five years from the date the record was made. These records shall be readily accessible during the first two years of the five-year period. Records of any swap or related cash or forward transaction shall be kept until the termination, maturity, expiration, transfer, assignment, or novation date of the transaction, and for a period of five years after such date. Such records shall be readily accessible until the termination, maturity, expiration, transfer, assignment, or novation date of the transaction and during the first two years of the five-year period following such date.11
Swap data repositories must keep records throughout the existence of the swap, plus an additional fifteen years. For the first five years following final termination of the swap, the records must be readily accessible by the swap data repository and available to the Commission via real time electronic access. Thereafter, the records must be kept for a period of at least ten additional years in archival storage, from which they are retrievable by the swap data repository within three business days.12
Additionally, the CFTC regulations specifically call out various forms of electronic communications (which includes those made via text message or through social networks), assigning a retention period of one year for these communications, versus the five year period for swap transaction records generally.13
In regard to the Bureau of Consumer Financial Protection, the recordkeeping requirements issued thus far are predominantly related to creditors and lenders, with new requirements to retain loan applications for 24 months or 12 months for business clients.14 The CFPB has also issued a requirement for lenders to retain documentation of compliance with the Truth in Lending Act for two years.15
Compliance Dates And Deadlines
On July 10, 2012, the CFTC formally approved the final definition of "swap," "swap dealer," and "major swap participant." These definitions were published in the Federal Register on August 13, 2012, triggering a countdown to the deadline by which institutions must be in compliance with the new regulations16. The compliance dates are set forth in the table on the following page.
Steps To Take:
If you are an institution that is required to comply with the new regulations, the following are some implementation items for your consideration.
- Update your Records Retention Schedule to reflect the new retention rules;
- Reach out to the business unit users impacted by the regulations to apprise them of the changes and their new responsibilities;
- Update any applications, systems, or repositories that use retention rules to manage the regulated records; and
- Collaborate with IT to determine how to comply with storage requirements – near term through archival.
Iron Mountain: Meeting CFTC/SEC/CFPB Requirements
Iron Mountain has a task force dedicated to monitoring recordkeeping requirements issued in relation to Dodd-Frank and their impact on banking and financial services records retention practices, and has ready a compliance toolkit for those who need to incorporate the provisions into their records management programs.
Because of this, Iron Mountain Consulting is prepared to help you navigate these uncertain times. We have the tools needed to assist you so that your retention schedules are updated to meet these compliance deadlines.
For more information about how Iron Mountain can help you meet your financial services compliance goals, contactIron Mountain — the industry leader in informationprotection and storage agency-wide, nationwide, and worldwide — at Consulting@ironmountain.com today.
1The Financial Stability Oversight Council (FSOC), the Office of Financial Research (OFR), and the Bureau of Consumer Financial Protection (CFPB)
2 The Office of Thrift Supervision (OTS)
3 CFTC FACT SHEET: Final Rules Regarding Further Defining “Swap Dealer,” “Major Swap Participant” and “Eligible Contract Participant”
4 SEC FACT SHEET: Defining Swaps-Related Terms
5-6 CFTC FACT SHEET: Final Rules Regarding Further Defining “Swap Dealer,” “Major Swap Participant” and “Eligible Contract Participant”
7 Substitution of a new contract for an old one
8 U.S.C. § 1a
9 7 U.S.C. § 7
10 17 C.F.R. § 45.2
11 17 C.F.R. §§ 23.201 - 23.203
12 17 C.F.R. § 45.2
13 17 C.F.R. § 23.202
14 12 C.F.R. § 1002.12
15 12 C.F.R. § 1026.25
16 CFTC Fact Sheet: Final Rule on Swap Data Recordkeeping and Reporting Requirements