Prudent Technology Investment; The Dodd Frank Act

Unified Communications Consultancy

Volatility and uncertainty drive profit generation in some capital markets. The same cannot be said when investing in trading infrastructure. It is shrewder to take an informed, incremental approach to your technology decisions or you may be seeing red 12 months down the line.

Dodd Frank

The Dodd Frank Act represents the largest piece of regulatory reform to hit Wall Street since the Great Depression. Its sheer scope and complexity mean that the rule-making target of 412 will not be achieved for some time as deadlines continue to be missed. At present 270 rules are “written” i.e. no longer subject to amendment. The imminent presidential election only adds to the uncertainty for the 142 that remain. Procuring a fully specced infrastructure solution with all the bells and whistles could leave you technically compliant but it is likely to represent a major overspend. This will leave you with a large hole in your budget as well as a medium term projection of high maintenance costs.


Record-keeping is key to compliance and let’s be clear; new technology will be required to handle the demands of Dodd Frank. It’s worth looking at a few of the new rules before clarifying our position. With respect to OTC derivative swaps, rule 23.201a requires each dealer and major swap participant to keep comprehensive, systematic records of all its swap activities. This means technology will be needed with the capability to record voice, instant messages and email to mirror similar legislation in other markets.

The Rules

Rule 23.202a asks swap dealers and major participants to ensure its records include all information necessary to conduct a comprehensive and accurate trade reconstruction for each swap. Each transaction record must be maintained in a manner identifiable and searchable by transaction and counterparty. So technology will be required to tag calls with transaction and counterparty identifiers. Associated electronic communications will also need to be captured to create comprehensive audit trails and compliant reports. Rule 23.202(a)(1) extends this to all written and oral pre-execution trade information extending the technology scope to fax machines, chat applications, voicemail and any other digital or electronic media.

23.202a1 i and ii look at the records themselves. The minimum requirement includes reliable timing data to the nearest minute in Coordinated Universal Time (UTC) that would permit complete and accurate trade reconstruction; this includes all quotations to or from counterparties. The tech requirement here is the accurate storage of time data.

23.203a-b requires records to be accessible within 72 hours at a pre-designated principal office. All digital and electronic media records are to be kept for a period of one year. This means technology solutions must encompass flexible archiving and storage facilities with ready access and long term capability.

Rule 23.203b (above) illustrates our point about avoiding hasty decisions. The initial proposal was for 5 year’s retention beyond the trade completion. SIFMA and ISDA negotiated this down to 1 year. Implementing a technology strategy based on the 5 year proposal would have been vastly more expensive, as these bodies were quick to point out. Anyone purchasing based on that criteria will be feeling sick right now. Projecting forwards, does every trade floor communication really need to be recorded and archived? After all, they are not all trade related so to do so would be an expensive way of capturing noise. Once again we would advise against opting for an overly comprehensive solution before you know what’s required. Even then the rules will remain open to interpretation.

Technology Strategy

Rather than a “wait and see” approach we do advise proactivity. A steady layering of new functionality allows you to manage the compliance budget prudently whilst adhering to regulations as you see fit. It also permits you to avoid committing to a single, powerful vendor. In the current technology market, major organizations have the opportunity to improve and diversify their supply chains by collaborating with innovative and motivated smaller firms. Enterprise needs to adapt, be bold, think differently and act in close partnership with its service providers. It is a core JP Reis value to always focus on the constant improvement of business processes. We believe objective and flexible vendor selection is a vital component of achieving this efficiently.

Dodd Frank Compliance

The capture and real-time reporting of verbal, written and data exchanges across contact centers, trading floors and back offices will be important though compliance issues can’t be genuinely solved with technology alone. For more comprehensive governance it is necessary to ring-fence some of the compliance budget for training personnel. At the superficial level this could simply mean asking trading staff to scan faxes to allow electronic storage. At a more fundamental level it could mean investing in a cultural realignment program.

There are many philosophies and strategies being used to navigate the labyrinth of Dodd Frank. Most of them are viable. Whichever approach your organization adopts, we recommend working with objective partners to stay informed, avoid speculation and get the desired returns from your technology investment for a sensible price.