Cognizant 20-20 Insights

FinfraG: Opportunities & Challenges

for Global Trading Platforms
FinfraG, the Swiss Financial Market Infrastructure Act,
provides a single code of law for financial institutions
organizational and operational infrastructures.

Executive Summary

A Single Code of Law for Financial Markets

The Swiss Financial Market Infrastructure

Act (FMIA), commonly known by its German
name, FinfraG, became effective on January 1,
2016. In addition to assuring that Switzerlands
regulatory framework complies with international standards, the act spells out regulations
for global derivative trading platforms and
central clearing parties. FinfraG also reflects
lessons learned from global regulatory reforms,
including Dodd-Frank;1 MiFID I;2 MiFID II;3 EMIR;4
and REMIT. 5

FinfraG aims to create a single code of law

for financial markets organizational and operational infrastructures, with regulatory obligations around reporting, clearing, platform
trading and risk mitigation (see Figure 1,
next page).

This paper describes the various aspects of

FinfraG, as well as a framework companies can
use to help achieve and maintain compliance,
and heighten efficiencies throughout the
enterprise.

cognizant 20-20 insights | september 2016

FinfraG also incorporates laws pertaining to

insider information/market abuse and shareholdings/public offers.
Figure 2 (next page) shows timelines for implementing FinfraGs key regulations. The details
of counterparty classifications, exposures and
effective dates of obligations may vary based on
classification.
As shown in Figure 3 (page 3), under FinfraG,
market participants obligations differ, and also
depend on the scope and volume of their business.

Regulating Organizational & Operational Areas

Reporting obligation for all
derivative contracts
Reports must be sent to
an approved trade repository
T+1 reporting

Obligation to clear eligible contracts

through FMIA-recognized CCP
Small entities exempt from
clearing obligation

Reporting
Obligation

Clearing
Obligation

Risk
Mitigation

Platform
Trading
Obligation to trade standardized
derivative on trading platform
(exchange, trading facilities
multilateral/organized
trading facilities)

Procedure for portfolio

reconcilliation
Identification and resolution
of disputes
Daily valuation and timely
confirmation
Exchange of collateral

Figure 1

FinfraG Implementation Timelines

Risk mitigation, portfolio reconciliation and
compression, dispute resolution
Valuation of outstanding derivatives

FinfraG
Enforcement

Timely confirmation
Bilateral margining

+6 months

2016

+9 months

+12 months

+15 months

Trade reporting
Trade reporting of ETD

Central clearing, new trades only

Platform trading, new trades only

Figure 2

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+18 months

How Companies Obligations Differ

Requirement

Financial
Small
NonSmall NonCounterparty Financial
Financial
Financial
Counterparty Counterparty Counterparty

Clearing

Yes

No

Yes

No

Trade reporting

Yes

Yes

Yes

Yes

Timely
confirmation

Yes

Yes

Yes

Yes

Portfolio
reconciliation

Yes

Yes

Yes

Yes

Dispute resolution

Yes

Yes

Yes

Yes

Portfolio
compression

Yes

Yes

Yes

Yes

Valuation

Yes

No

Yes

No

Collateralization

Yes

Yes

Yes

No

Yes

No

Yes

No

Basic risk
mitigation for
non-cleared
trades

Risk mitigation

Electronic
trading
Figure 3

Deconstructing FinfraG,
Dodd-Frank & EMIR
Following are areas where FinfraG, Dodd-Frank
and EMIR obligations vary.
Reporting: All derivatives transaction data,
including OTC and exchangetraded derivatives
(ETD), must be reported to a trade repository
recognized by FMIA, similar to EMIR, whereas
in the U.S., ETDs do not have to be reported.
FinfraG and DoddFrank reporting obligations
are singlesided, i.e., only one of the counterparties will have to report the transaction to
the repository. A cascade principle is used to
determine the reporting party. EMIR requires
reporting by both sides. A counterparty can
connect to a recognized trade repository and
report in a specified format within the T+1
deadline.
Clearing: All eligible contracts must be cleared
through a central clearing counterparty
recognized by FMIA. Similar to the U.S., FinfraG
provides exemption to small financial counterparties, whereas EMIR does not. Also, FX
transactions have been kept out of the scope of
clearing obligations, unlike EMIR.
Risk mitigation: To reduce counterparty and
operational risk, contracts not traded through an
exchange or centrally cleared are subject to risk

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mitigation. The main elements of risk mitigation

(confirmation timeframe, portfolio reconciliation, dispute resolution, portfolio compression)
remain the same across regulations.
Platform trading: Eligible derivatives must
be traded via trading facilities or an operator
of an organized trading facility authorized or
recognized by FMIA. The U.S. has introduced
swap execution facilities (SEFs) for trading of
standardized OTC derivatives. In Europe and
in Switzerland, the trading obligation requires
trading on a regular market/exchange, multilateral trading facilities (MTFs) or recently
introduced ordinary trading facilities (OTFs).

Developing a Compliance Roadmap

Unprecedented demand and evolving regulatory
requirements in the OTC space requires an
overhaul of the organizational spread and a
holistic approach to building a process and
technology infrastructure with an eye on future
regulatory requirements (see Figure 4, next
page). Traditionally, many financial institutions
have chosen tactical solutions over strategic
approaches simply to meet the deadline
limiting benefits and, in the long run, resulting
in cost and effort overruns. A sustainable, agile
solution is the best, most efficient way to assure
compliance.

A Reference Architecture for Regulatory Reporting

Regulatory
Reporting

Trade
Repository

FpML

FTP/SFTP

Client
Reporting

Swift

Web Service

Others

Report development based

on the templates
Reference
Counterparty
data
Asset class data

Rules-based engine (asset class & event-based)

Client data

Validation & Reconciliation

Market data

Workflow

Centralized data warehouse

ETL Layer

Legal identifier

Staged Data

Trade & Position

Collateral & Margin

Market Valuation

Risk Data

Transformation & Enrichment

Source

Source

Source

Source

Source

Figure 4

There are several steps institutions can take

to help assure that their critical assets technologies, processes, data and people align and
comply with FinfraG regulations.

In

view of the new regulatory requirement,

perform a gap analysis of current processes
and systems.

Carry

out a cross-border trade compliance

assessment; determine the overlaps, gaps and
equivalences with other applicable legislations,
such as Dodd-Frank and EMIR.

Assess Regulatory Readiness

Understand

the existing trading environment, determine your companys exposure

to FinfraG, and gauge the impact on your
organization.

Design & Update Contracts/Policies/Procedures

Set up a contractual framework and documen-

tation for central counterparty clearing and

client clearing.

Validate

OTC counterparties; analyze OTC

derivatives products (transaction validation).

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 Develop

Enable transaction and position reporting for

Establish

The Way Forward

a contractual framework and documentation for trade repository reporting.

internal processes that satisfy the
new requirements incorporating all involved
departments.

Update

bilateral contracts for non-clearable

trades to comply with the new rules.

Adjust Collateral Management

Shift responsibilities to the front office.

Centralize collateral management for groups of

internal and external clients.

For companies competing in the continually

evolving regulatory space, a tactical solution
can be useful for achieving short-term gains.
However, institutions will be better served by
adopting a holistic approach that addresses the
following questions:

What type of regulatory changes can we expect

down the road?

companies to better utilize collateral.

Implement an organizational structure across

Are regulatory requirements and responsibili-

Integrate processes for bilateral and centrally

Are we making the best use of our internal and

Optimize regulatory figures (RWA, LCR, etc.).

Do we have the information, processes and tools

Develop an Information Architecture for Data

Management & Central Reporting

Are

ties clearly understood across the company?

asset classes (derivatives and repo).

external data?

cleared transactions.

needed to achieve and maintain compliance?

our technology assets hardware,

operating systems, networks and applications
equipped to meet the heavy-duty demands
of a highly regulated, increasingly competitive
global market?

Extract data from different sources (reporting

transaction, instrument, counterparty, and
lifecycle-event data) at stipulated frequencies
(near-real time, intra-day), including newer
uniform type identifiers (UTI).

Is our infrastructure people, processes and

systems well planned, well governed, and

highly efficient?

Develop

a data transformation model for

refining and enriching raw data.

Update collateral and database asset classes.

Centralize validation and reconciliation using

a configurable engine (IRS, CDS & FX) and

specific events.

Implement

a rules-based engine to cater to

accounts, region and asset class, and to quickly
respond to changing requirements.

Have

we established a solution roadmap

and reasonable timelines short, standard
and long-term for meeting the compliance
deadline?

Companies that view compliance as an opportunity to rationalize, optimize and synchronize

their technologies, operations, processes and
workforce teams will set the pace for others.

Prepare data per repository (message ID and

transformation according to format, e.g. FpML).

Improve

messaging/communications via a
trade repository; evaluate reporting formats
provided by the repository.

Footnotes
1

www.gpo.gov/fdsys/pkg/PLAW-111publ203/content-detail.html.

http://ec.europa.eu/finance/securities/isd/mifid/index_en.htm.

http://www.economist.com/news/finance-and-economics/21601294-bold-new-law-will-reshapeeuropes-capital-markets-bigger-bang.

http://www.hsbcnet.com/gbm/financial-regulation/emir.

http://www.acer.europa.eu/en/remit/Pages/Background.aspx.

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About the Author

Shantanu Dubey is a Consultant within Cognizant Business Consultings Banking & Financial Services
Practice. He has over nine years of business and IT consulting experience in the implementation of
BASEL / regulatory reporting and banking solutions. He works with leading banks on product development, business process optimization, business requirement management and gap analysis across
various geographic locations. He holds a bachelors degree in information and technology engineering,
and a post graduate diploma in management. He can be reached at Shantanu.dubey@cognizant.com.

About Cognizant
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