Getting Ready for Swaps: SEC Requirements for Records

What Changes Were Made to the Records Requirements?

In June 2019, the Securities and Exchange Commission (SEC) adopted a new suite of rules and amendments under the Dodd-Frank Act, Title VII. These changes represent a continuation of increased regulatory oversight of security-based swap dealers (SBSD) and major security-based swap participants (MSP). Leading up to the October 2021 implementation, DHG is introducing a series of articles on the new swap rules. This issue provides information on Rule 17a-3 and 18a-5, the Records Requirement which are most pertinent to the financial regulatory groups.

TAKE NOTE

The following rules may impact the SBSD, MSP and broker-dealers.

  • 17a3(b) 18a-5(c) – Allows SBSD, MSP or broker-dealers to comply with requirements of Commodity Exchange Act for certain records pertaining to security-based swap (SBS) transactions.
  • 17a-3(c) – Allows a broker-dealer introducing accounts on a fully disclosed basis relief from making a record of clearing transactions.
  • 17a-3(d) – Allows transactions in municipal securities relief from these rules if firm in compliance with Rule G-8 of the Municipal Securities Rulemaking Board (MSRB).
  • 17a-3(e) – Transactions in security future products will not apply under this rule as long as Commodities Future Trading Commission (CFTC) recordkeeping rules are applied.
  • 18a-5(a) – Rule citations apply when SBSD and MSP are not subject to a prudential regulator.

The following components are instrumental in preparing the regulatory reporting, and companies should identify the source of the following records and take note of the specific requirements when preparing to comply with the new SBSD and MSP rules.

RECORD

RULE

DESCRIPTION

RULE APPLICABILITY TO SWAPS

Blotters

17a-3(a)(1)

18a-5(a)(1)

Record of original entry reflecting purchases and sales, receipts and deliveries of securities, receipts and disbursements of cash and all other debits and credits

Firms should have blotters or other trade records that include SBS transactions.

Ledger Accounts

17a-3(a)(2)

18a-5(a)(2)

Ledgers reflecting assets, liabilities, income and expense and capital accounts

Ledger systems for SBS should be have the same type information as ledgers for securities information.

Ledger Accounts – Customers

17a-3(a)(3)

18a-5(a)(3)

Itemized Separate activity in each customer (and under 18a-5, SBS non-customers) account

For SBS, the customer ledger should include the following:

  • Type of SBS
  • Reference security, index, or obligor
  • Date/Time of Execution
  • Effective Date
  • Termination Date
  • Notional Amounts
  • Currencies of Notional Amount
  • Unique Transaction Identifier
  • Counterparty’s Unique Identification Code

Ledger Accounts – House

17a-3(a)(4)

Itemized Separate activity in each house account – transfers, dividends and interest, securities borrowed and loaned, fails to receive and fails to deliver, securities records differences and repurchase and reverse repurchase agreements

Ledger accounts should capture any items related to SBS including differences from examination, count, verification and comparison.

Securities Record

17a-3(a)(5)

18a-5(a)(4)

Shows the Location of Securities - Reflects all long or short positions

For SBS, the stock record should include the following information:

  • The reference security, index or obligor
  • Unique transaction identifier
  • Counterparty unique identification code
  • Whether bought or sold
  • Whether cleared or not cleared (if cleared, the clearing agency where swap cleared)

Memorandum of Each Brokerage Order

17a-3(a)(6)

18a-5(a)(5)

Record of order given or received for the purchase or sale of a security or security-based swap

For SBS, the order ticket shall include the following:

  • The terms and conditions of the order (including modification or cancellation)
  • Time order received, entered
  • Execution price
  • Identity of each associated person and person entering order for customer
  • Type of SBS
  • Reference security, index or obligor
  • Unique transaction identifier
  • Unique identification code of counterparty
  • Effective date
  • Termination date
  • Notional amounts and currency

Trial Balance and Record of Net Capital Computation

17a-3(a)(11)

18a-5(a)(9)

Record of the proof of money balances and computation of net capital prepared at least monthly

The trial balance used for preparation of the monthly regulatory reporting should include balances related to SBS.

Current Exposure and Initial Margin

17a-3(a)(25)

18a-5(a)(12)

Record of the daily calculation of the current exposure and applicable initial margin

Regulatory reporting groups need margin information for the net capital calculation and preparation of SBS customer reserve formula.

Compliance with Possession or Control

17a-3(a)(26)

18a-5(a)(13)

Record of compliance

Possession on Control items pertaining to SBS should be included in the regulatory reporting submitted to the SEC.

Record of the Reserve Computation for SBS

17a-3(a)(27)

18a5-(a)(14)

Reserve Computation for SBS Customers

The record of the computation should exist as computed under 15c3-3(p)(2).

Prepare for Compliance

Broker-dealers and swap-dealers should understand the rules and be prepared for the new processes. To prepare for compliance, we suggest the following steps:

  • Review the systems used for swaps.
  • Understand the interaction of the trading systems to the books and records of the company.
  • Check each record so that the requirements of the new and revised rules are met.
  • Develop a plan of action to address missing elements.
  • Create a sustainable review process.

For detailed information on the new and revised rules, refer to the Federal Register 84 FR 68656.

How Can DHG Help

DHG works with your organization to more fully understand your reporting needs. We help develop a course of action and put the plan in motion with a wide range of professional skills and an extensive understanding of industry standards. This approach allows us to quickly provide value to your company with tailored services. For more questions, reach out to us at advisory@dhg.com.

Our Approach

Assessment: We make sure we understand your organization’s SBSD and MSP entity structure and the products being offered by your company. By understanding the entity and products, we can provide a gap assessment of which records need to be reviewed for compliance. 

Strategy & Design:We establish teams and build a detailed plan for quality results to implement the new reporting requirements.

Analysis & Implementation: We develop a comprehensive analysis of the required elements for each record so that each required item is included in the records.

Sustainability: We help companies to have a process in place to meet the continued reporting requirements after implementation. This process includes detailed documentation, process flows, and controls for accurate records.

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