Hedging interest rates is a regulatory-heavy world. Recent requirements, specifically the Dodd-Frank Wall Street Reform and Consumer Protection Act, have increased documentation and reporting burdens on borrowers. We provide expert guidance through the complexities of the regulatory landscape, ensuring compliance every step of the way.
When Is Dodd-Frank Compliance Needed?
- Before executing a new interest rate or commodity derivative, foreign exchange, other derivative, or other covered transactions
- Before amending an existing transaction
- Credit Extensions. Many financial institutions will require Dodd-Frank compliance in respect to an interest rate derivative in order to negotiate and/or extend an underlying loan facility, credit agreement or commitment (e.g., the extension of a put date on a privately placed bond).
Global Markets Entity Identifier (GMEI) & Legal Entity Identifier (LEI)
CFTC regulations require a counterparty to a derivative, such as a fixed-payer interest rate swap or an interest rate cap, to obtain a Legal Entity Identifier (LEI), also known as a Global Markets Entity Identifier (GMEI). A GMEI is a unique alphanumeric code associated with a single, legal entity. This unique code allows regulators to track derivative transactions across various asset classes and markets. Its goal is to help improve the measuring and monitoring of systemic risk and support more cost-effective compliance with regulatory reporting requirements as mandated by the Dodd-Frank Act.
Instructions for obtaining a GMEI, and cost and estimated times of fulfillment can be obtained in our GMEI guide.
An additional requirement is the borrower’s execution of the ISDA August 2012 Dodd-Frank Protocol (1.0) or an analogous bilateral agreement and questionnaire responses directly with a Swap Dealer to address topics including, but not limited to, External Business Conduct Standards, Safe Harbors, Exchange of Data and Reporting Requirements. In the case of adherence to the 1.0 Dodd-Frank Protocol also requires a Markit.com login to match counterparties to relevant Swap Dealers and exchange questionnaire responses.
Before executing a hedge with a bank counterparty, the bank will ask that you complete their own, unique set of Dodd-Frank client onboarding documents. These documents typically require you to elect an End User Exception. Under the new law, swaps are subject to a mandatory clearing process unless you qualify for an End User Exception. In general, you’re representing that your executing the derivative to mitigate commercial risk, and that you are hedging an underlying financing and not using the derivative to speculate on interest rates.
Mark To Market (MTM)
Dodd-Frank also requires banks to provide the hedger with a daily valuation of the hedge, usually communicated via email. While useful for the hedger, this “daily mark” has no relevance to the actual value of the hedge should you wish to terminate.
Banks are prohibited from assisting you with the Dodd-Frank compliance process due to arms-length provisions of the regulation. Derivative Logic guides our clients through the process, ensuring your compliance with the onerous regulation over the life of the hedge.