One of the more vexing rules to emerge from the Commodity Futures Trading Commission in recent months regards recordkeeping demands that might call to mind the old game show “Beat the Clock.” When asked, swap dealers will have just 72 hours to turn over every single record and communication related to a specific trade or series of trades.

Banks say they will struggle to meet that deadline in what is known as the CFTC’s trade reconstruction rule because of the fragmented character of both in-house technology and the data itself. “You have slow legacy systems and you have your records scattered across systems,” Harald Collet, global business manager for Bloomberg Vault, says. “You just don’t have enough time to go manually pull it together.”

In an informal survey of attendees at a Bloomberg Vault roundtable in June, only 7 percent said they felt confident they were ready to meet the new trade reconstruction requirements, which took effect in 2012, but were delayed until last May by several no-action letters to many in the industry. So far, the CFTC has yet to exercise its expanded ability to demand data.

Participants at the Bloomberg event considered pre-trade to be the hardest part of the trading workflow to address, and the audience was in unanimous agreement that searchability and tagging of unstructured data with trade identifiers were the most challenging aspects of that pre-trade workflow. Eighty-five percent of those surveyed have been working on readying their systems to manage trade reconstruction requirements since the beginning of 2014, and 64 percent had been working on it for more than 12 months.

“You have slow legacy systems and you have your records scattered across systems. You just don’t have enough time.”
Harald Collet, Global Business Manager, Bloomberg Vault

The CFTC can limit or expand the size of any records request as it sees fit, from pre-trade to execution to post-trade, and can request both written and verbal data. “The bottom line is that regulators are looking for transparency in a non-transparent market,” Mitch Avnet, founder and managing partner of swaps market Compliance Risk Concepts, said during a recent webcast sponsored by Bloomberg Vault. “The swap market, historically, has been non-transparent, and this is an effort to get to a place where the regulators can have a full understanding of a swap lifecycle given how complicated the structure can be. All the requirements are so regulators can map out all avenues of the swap, pre- and post-trade, to give them the insight they have been historically looking for.”

Several Platforms

In the past, Collet says, a records churn of this scale would take months, “but now you literally have hours.” The deadline is even more pressing because firms need time to parse and package the data before it is turned over. “You want to be able to pull it immediately, figure out what data you have on hand, and assess whatever issues you may face from the evidence you are about to hand over,” he says.

Data aggregation is further complicated by the diverse array of communication tools firms, their traders, and customers may rely upon. “You want to be able to capture efficiently from any channel a person might have access to,” Collet says. “Different segments of the market communicate in different ways.” Among the communication tools at a firm’s disposal, a list that seems to expand by the day: landline and mobile phones, texts, e-mail, cloud services, Facebook, instant messaging, Twitter, Yammer, Sales Force Chatter, AOL and Yahoo platforms, and even the self-destructing selfie service SnapChat. “We are constantly trying to find ways to stay ahead of all of these new channels,” he says.

How should firms face these challenges, which come against a backdrop of ever-increasing regulatory and reporting demands? Collet’s advice is to have a response plan that allows you to pull data quickly, a task that requires some front-end work. One way to think about trade reconstruction is to view it as ongoing surveillance. “If you are putting all this data in a place you have to very quickly query it for trade reconstruction, and that really is surveillance,” he explains. “They are two sides of the same coin.”


The following is from a Q&A provided by the Commodity Futures Trading Commission regarding reporting, recordkeeping, and daily trading records requirements for swap dealers and major swap participants.
What is the goal of the rulemaking?
The Dodd-Frank Act establishes reporting, recordkeeping, and daily trading records requirements for swap dealers and major swap participants and requires the CFTC to adopt rules prescribing the records to be maintained by swap dealers and major swap participants and the required reporting by such entities. The goal of the final rulemaking is to set forth the records to be maintained by swap dealers and major swap participants and required reporting by such entities.
What registrants are covered by the final regulations?
The final regulations would apply to swap dealers and major swap participants.
What are the daily trading record requirements?
The final rules set forth daily trading record requirements, which include trade information related to pre-execution, execution, and post-execution data. The final rule requires swap dealers and major swap participants to ensure (1) that they preserve all information necessary to conduct a comprehensive and accurate trade reconstruction for each swap, and (2) that they maintain each transaction record as in a form identifiable and searchable by transaction and counterparty.
Pre-execution trade information includes records of all oral and written communications that lead to the execution of a swap, whether communicated by telephone, voicemail, facsimile, instant messaging, chat rooms, electronic mail, mobile device, or other digital or electronic media. This rule requires swap dealers and major swap participants to maintain recordings of telephone calls and other communications created in the normal course of its business, but would not establish an affirmative new requirement to create recordings of all telephone conversations if the required recordkeeping is met through other means, such as electronic messaging or trading.
Source: Commodity Futures Trading Commission.

That effort will not be easy, Collet cautions. “What you need is a big data platform that can respond very efficiently to these demands,” he says. “A lot of firms are looking at this problem and realizing it requires data scientists, scalable infrastructure, real-time search, and surveillance across, potentially, many millions of artifacts, communications, records, and trades. It’s a very complicated ball of wax.”

Audio Volume

One of the trickiest demands is collecting, tagging, and cataloging voice communications, cataloging the various .wav files that the CFTC will demand, says Simon Richards, CEO of Fonetic, a firm that offers banks speech and data analytics services. Institutions that may have tried to tackle the data collection solely in-house appear to be increasingly turning to outside vendors, he says, perhaps spooked by big fines that the CFTC could impose. “The market is starting to take it more seriously,” he says.

How complicated will it be to wrangle all voice communications? Richards crunched some numbers: a sampling of 3,000 traders in five different locations across the globe showed that they generated 5.6 million hours of calls. “And that’s just 3,000 traders, if you look at JPMorgan, Citibank, and other large banks, they could have as many as 15,000 traders. You could be looking at 10 million hours of calls,” he says.

The global nature of business means that language is a complicating factor as well. Fonetic’s software is built to monitor and tag voice calls and texts in 84 languages. Many of the required tasks are all but impossible in the traditional transcript-based model, Richards adds.

Automation will be important as banks look to stay ahead of the necessary tagging. “With the amount of communications and the complexity of trades, you have to place a focus on automation,” Collet says. “You can’t involve the trader in tagging every single communication that they have. You have to let the computer do the heavy lifting.”

To avoid drowning in complexity, Collet suggests arming compliance officers with analytical tools that allow them to “focus on the higher level analysis, instead of sifting through different stovepipes of data.” Once the data is collected, a pre-submission review is also crucial. “You want to avoid a fishing expedition by handing over data that is not necessary or have a response plan for the data that is handed over,” he advises. “An outside service provider or in-house team can start reviewing the data, so that you are prepared for what you are turning over to the regulators. It is possible to claim some is privileged or you want to have a discussion with them about it.”

A lingering question is when the CFTC may decide to start enforcing its strict new trade reconstruction demands. “The no-action letters have expired, and at this point the rules are on the book,” Collet says. “There is back and forth between the regulators and the industry to refine elements, but the scope has not changed and there is no backing away from the essence of the rules by the regulators. That means, essentially, that you have to take this fragmented set of communications that a trader or an associated person under the Dodd-Frank Act can have with counterparty.

 “This legislation isn’t going to go away and there is an expectation from shareholders, stakeholders, the public, and regulators that banks must behave appropriately,” Richards says. “The banks need to accept that.”