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QFC Recordkeeping

Understanding QFC Recordkeeping and how to comply

In the aftermath of Lehman, the U.S. government launched a number of regulations to account for the ripple effects of such a collapse (Monticello Consulting has a great infographic of the timeline, we suggest you check it out). One of these regulations was QFC Recordkeeping.

What is QFC recordkeeping?

Qualified Financial Contract (QFC) Recordkeeping is a regulation wherein financial institutions are required to submit a report of all open QFC positions, to all of its counterparties, to the FDIC. Transcend sums it up nicely:

[QFC Recordkeeping] requires that financial firms produce one consolidated report for all in-scope entities within a corporate group, capturing end-of-day positions of QFCs for in-scope products, along with their governing agreements, collateral, margin, counterparty info and related reference data.

These reports provide the FDIC, when executing the Orderly Liquidation Authority (OLA) under the Dodd-Frank Act, with the most up to date information on all of the firm’s QFC’s in the event that the FDIC needs to step in as the receiver of a failed financial institution. These measures are part of the government’s objective to ensure that no financial institution can be deemed too big to fail.

What is considered a QFC and who is affected?

According to the FDIC (page 11), a QFC includes swaps, repo and reverse repo transactions, securities lending and borrowing transactions, commodity contracts, and forward agreements. As of March 2019, only banks with assets above $1 trillion were required to submit these reports, but in 2020 and into 2021, all banks with assets in excess of $50 billion will fall under this mandate. It impacts U.S. institutions, intermediate holding companies of foreign banks and some non-bank affiliates of these institutions. There have been a number of exemptions granted for subsidiary entities of banks, but the exemption process brings another work-stream in the preparation process for compliance, in addition to the data management changes that are required.

QFC Recordkeeping reports

Under QFC Recordkeeping there are 128 data fields that must be reported on, and of those, 96 are unique. They are broken up into 8 different types, which need to be organized in 8 standardized tables:

  • Position Level Data – QFCs with their external counterparties
  • Collateral Detail Data – collateral items linked to QFC positions
  • Counterparty Netting Set Data – aggregated QFC and collateral positions under a netting agreement
  • Legal Agreements – primary governing and netting agreements for QFCs in the position and collateral tables above
  • Corporate Organization Data – affiliate companies belonging to the bank holding company
  • Counterparty Data – QFC counterparties, their hierarchies, and contact details
  • Booking Information – QFC-related position booking systems and contact details
  • Safekeeping Agent Data – custodians that maintain the collateral of the institution and their counterparties’ collateral

These reports do not need to be submitted regularly, but they do need to be producible when the FDIC calls upon them – typically, by 7am the next business day. While much of this data may already be actively managed, compiling the data (possibly from disparate systems) into the standardized tables mandated by the FDIC will take time. So while banks may feel like they can wait until their deadline kicks in, it would be far better to get the infrastructure, workflows, data linkages and validation checks in place ahead of time.

Data Challenges

In terms of data challenges, as we mentioned above, compiling that data will be tedious for some firms – but before that, how does one identify all of the data that falls under the QFC Recordkeeping purview? Firms will be required to have dedicated and proper Legal Entity Identifiers (LEIs) for each of their entities, complete with entity hierarchies and organizational charts. They will also need to identify which contracts and agreements held within each entity are sin-scope for QFC recordkeeping. This requires a trusted product taxonomy to be in operation.

Next, firms will need to ensure that the data is normalized and linked across the business. Disparate systems and siloed departments can make it significantly more problematic to identify and compile, so a single source of data will go a long way to ensuring compliance – especially when firms are aggregating their risk exposure across entities and counterparties, covering the entire banking group.

The Legal Agreements section could also be a source of frustration for financial institutions. Many legal documents are either hardcopies or pdfs, both of which require a fair amount of manual effort to get their details in the system. There are solutions that can help digitize those documents, but you’ll want to ensure you have a data management system that can capture and normalize the information from them, plus organize it for the reporting process.

Recommendations for QFC Recordkeeping

At the risk of sounding biased, enterprise wide data management checks all of these boxes. Having a data management system built on a rock-solid data model that is integrated across data types and provides a single version of the truth takes the uncertainty and tedium out of the process, allowing financial firms to deliver complete, accurate, and timely reports when the FDIC calls – both now and in the future.

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