Pillsbury Winthrop Shaw Pittman

Reconciliation + regulation = complication

Comparing the key terms of over-the-counter derivatives trades against the data held by a counterparty is standard practice for many over-the-counter derivatives participants, but incoming regulation on both sides of the Atlantic will change some of the requirements, make it a compliance issue for the first time and — crucially — will force many smaller players to put completely new processes in place.

For firms that have not had to think too deeply about trade reconciliation before, the regime could come as a nasty shock. The obvious solution — possibly the only one, given the timeline — is to use one of the available third-party services, but this has problems of its own. Important regulatory processes can, of course, be outsourced, but it does not transfer the compliance responsibility away from a regulated entity. As a result, the decision needs to be a careful, considered one — but with US reconciliation requirements due to take effect on 1 July and the European equivalents scheduled for 15 September, there is a danger that some derivatives users may rush to adopt a third-party provider without thinking the consequences through…

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