© 2012 Promontory Financial Group, LLC. All rights reserved.

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CONFIDENTIAL

Technology Advisory Committee

Review and Assessment of Interim Recommendations of the 

Subcommittee on Data Standardization

Working Group #2: Machine-Readable Legal Documents

March 29, 2012
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Contents

• Background

• Review Process

• Promontory Assessments and Conclusions
© 2012 Promontory Financial Group, LLC. All rights reserved. CONFIDENTIAL

Background
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Background – Joint CFTC/SEC Survey

The CFTC and SEC conducted a joint survey on the “Feasibility of Mandating Algorithmic Descriptions for

Derivatives”, as required by Section 719(b) of the Dodd-Frank Act. The joint survey discussed the issues

around i) electronically representing derivatives with sufficient precision and detail to facilitate collection,

reporting, and analysis of risk exposures, including calculation of net exposures; and ii) the possible

implementation of standardized, computer-readable descriptions for all derivatives.

Working Group #2 was assigned to propose data standardization approaches for the machine-readable

representation of legal documents. This working group presented interim recommendations that suggested

initiatives to further progress the development of algorithmic descriptions for derivatives, with consideration

given to the conclusions contained in the Report.
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Background – Working Group #2

Working Group #2 Members Working Group Coordinator and Government 

Representatives

Pierre Lamy, Goldman Sachs Nancy R. Doyle, CFTC

Paulo Rodela, BlackRock Solutions Walter Hamscher, SEC

Michael Will, Innodata docGenix LLC Bill Nichols, Office of Financial Research, U.S. 

Treasury
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Background - Promontory Financial Group

 Promontory Financial Group, LLC (“Promontory”) is a financial services consulting firm headquartered in 

Washington, D.C. with 14 offices around the world.

 Commissioner O’Malia requested Promontory’s assistance in vetting the interim recommendations of Working 

Group #2.

 Promontory does not have a proprietary interest in the Working Group #2 interim recommendations nor in their 

implementation. We did not approach the review of these recommendations from any one client’s perspective. 

Our clients include, or have included, the CFTC, existing DCOs and DCMs, and entities that will register as 

SDRs, swap dealers and major swap participants, as well as many institutions that are financial and commercial 

end-users of swaps. 
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Review Process
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Considerations

Promontory conducted the review of Working Group #2’s interim recommendations by 

assessing the recommendations against the following considerations:

 Consistency with Dodd-Frank Act Title VII statutory provisions and rulemakings and 

international standards

 Cost and ease of implementation by SDRs and reporting Swap Entities

 “Time-to-market”

 Consistency with current industry initiatives

 Actionability

The following slides identify these specific considerations where applicable to the 

assessment of the particular recommendation.
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Promontory Assessments and Conclusions
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Interim Recommendation - 1

Assessment 

Consistency with regulatory requirements:

• Reporting rules require regulatory reporting of Creation Data and 

Continuation Data as detailed 17 CFR Parts 45 and real-time transaction 

data as detailed in 17 CFR Part 43

• The GPR may not contain all of these required data fields for complex 

and bespoke products

• In the case of Confirmation Data, CFTC rules permit entities to submit an 

image of the confirmation in lieu of an electronic report in the first 180 

days following the reporting compliance date. 

Cost and ease of implementation:

• Most reporting parties are likely to already be using the FpML data 

format

• The cost and time involved to develop a full representation for 

complex and bespoke swaps would be considerable

“Time-to-market”:

• Approximately six months to implement the FpML GPR

Current industry initiatives:

• Industry stakeholders confirmed this recommendation is in line with 

current market practices

• The existing DTCC Copper Record is a type of GPR

Actionability:

• The FpML Standard CSA Working Group has started developing version 

5.3 of the FpML standard which is intended to include the GPR

Adopt the Generic Product Representation (“GPR”) for reporting of complex and bespoke products to equip 

regulators with an appropriate level of information while preserving the ability of the marketplace to innovate

Conclusion

We support this recommendation as, in our view, it is an appropriate solution to the

ongoing reporting of complex and bespoke products. However, the reporting rules

would need to be modified to allow this solution to be implemented. We believe that

as new complex and bespoke products are developed over time, there will be

continuing challenges in the reporting of all the required data. In order to

accommodate the evolution of the markets and the development of new products,

we believe that the TAC should recommend that the CFTC:

i) Consider providing long-term exemptive relief from the requirement to report

all Confirmation Data in an electronic format for complex and bespoke

products, which is currently limited to 180 days after the compliance date. 

This will provide the industry with the flexibility to continue to innovate and

develop new complex and bespoke products for which It would be difficult to

immediately report all the transaction economics in a standardized electronic

format. If a long-term exemption is provided, the CFTC should periodically

review products in the market to determine if data standards have been

developed or evolved sufficiently to adequately capture the required

information for certain complex and bespoke products. Upon a determination

that a product may be fully represented electronically, the CFTC may then

want to take appropriate action to mandate electronic reporting for those

particular complex and bespoke products; and

ii) Allow the other required reports (Primary Economic Terms, Continuation

Data and real-time transaction data) to be submitted without the data fields

that relate to payoff streams and that are not supported by the GPR for those

complex and bespoke swaps that require use of the GPR.
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Interim Recommendation - 2

Leverage the ISDA Standard Credit Support Annex (“SCSA”) initiative to create a highly “standardized” data 

representation of the ISDA SCSA. Explore possibility/options for electronic execution.

Conclusion

Of the documents currently used to document swaps relationships and

transactions, the CSA probably provides the most value in terms of

information necessary to calculate net exposures of swaps

counterparties, and we agree that it is an appropriate place to start. 

Therefore, we support this recommendation. The TAC should

recommend that the CFTC continue, outside of the formal rulemaking

process, to encourage the development of the SCSA and, thereafter, a

machine-readable representation of the SCSA. It should be noted that

the SCSA would primarily be used by large firms that have numerous

counterparty relationships, and can only be adopted once it is accepted

by the industry internationally.

Assessment

Consistency with regulatory requirements:

• Although it is an essential metric in performing risk analysis and prudent 

market surveillance, there is no statutory requirement that the CFTC 

calculate valuations or net exposure for swaps

• The CFTC/SEC joint survey concluded that machine-readable legal

agreements are feasible

Cost and ease of implementation:

• Currently electronic representation of legal documents is done only on 

an as-needed basis 

• Ensuring a machine-readable document is legally sound will require a 

legal analysis and opinion

“Time-to-market”:

• No estimates as to how long this will take

Current industry initiatives:

• The framework for an SCSA has been largely developed by ISDA, which 

is expected to be finalized in 2012

• FpML has put together a working group to develop an electronic 

representation of the SCSA

Actionability:

• The CFTC/SEC joint survey determined technological feasibility

• Acceptability by the industry, the most important factor of this effort, may 

take some time
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Interim Recommendation - 3

Regarding legacy portfolio legal agreements, finalize an industry-wide survey to identify legal agreement 

information relevant to systemic risk. Survey will confirm scope, feasibility and collate information relevant to a 

cost-benefit analysis.

Conclusion

We agree with the approach suggested, i.e., finalizing a survey to

identify the potential impact of legacy portfolios on systemic risk,

assess the scope and feasibility, in order to perform a cost-benefit

analysis of converting legacy legal agreements into machine-readable

form. Given the importance of the survey and the need to obtain

sufficient intelligence relating to legacy portfolio legal agreements, we

believe the timing of the survey is key so that it receives the attention

from industry that it warrants. Due to the substantial effort being

undertaken by industry participants to comply with Title VII rules in

2012, we suggest that the TAC recommend that the CFTC consider

delaying the survey until after industry participants have completed their

initial compliance efforts.

Assessment

Consistency with regulatory requirements:

• No statutory or regulatory requirement for the electronic representation of 

legal documents, whether future or legacy

• The CFTC/SEC Report concluded that a public-private collaboration 

would be most beneficial to furthering this effort

Cost and ease of implementation:

• Cost will be known only following the outcome of the survey

“Time-to-market”:

• If conducted soon, this survey may not receive the attention that it 

warrants due to the industry's current focus on other regulatory 

compliance activities