The CFTC has put forward modifications to their swap reporting rules which bring uncleared swaps into scope and dramtically change the data payload to SDRs.

One of the practical impacts of Dodd Frank was for firms trading OTC products to report on their trading activity to the CFTC, SEC, ESMA and other regulators around the world. The CFTC have put forward revisions to their rules which are intended to improve data quality and the streamline the reporting process.

The changes fall into three areas

• Part 43 to change the definition of block trade thresholds, sizes and delays.
• Part 45 changes to swap data elements and the reporting process
• Part 49 changes to the swap verification process, and changes to the resolution of errors

A summary announcement with links to the proposed amended regulations is here:

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Washington, D.C. — The Commodity Futures Trading Commission at its open meeting today unanimously approved two proposed rules to revise CFTC regulations for swap data reporting, dissemination, and public reporting requirements for market participants. The Commission also unanimously approved reopening the comment period of a proposed rule to amend certain agency regulations related to swap data repositories. All three measures are intended to improve data quality and streamline CFTC regulations.

Proposed Rule: Amendments to the Real-Time Public Reporting Requirements (Part 43)

The Commission unanimously approved proposed revisions to its regulations for real-time public reporting and dissemination requirements for swap data repositories (SDRs), derivatives clearing organizations (DCOs), swap execution facilities (SEFs), designated contract markets (DCMs), swap dealers (SDs), major swap participants (MSPs), and swap counterparties that are neither SDs nor MSPs. The Commission also approved proposed revisions that, among other things, will change the “block trade” definition and the block swap categories; update the block thresholds and cap sizes; and adjust the delay for the public dissemination of block transactions.

This proposed rule has a 90-day comment period following approval by the Commission.

Proposed Rule: Amendments to the Swap Data Recordkeeping and Reporting Requirements (Part 45)

The Commission unanimously approved proposed revisions to its regulations that establish swap data recordkeeping and reporting requirements for SDRs, DCOs, SEFs, DCMs, SDs, MSPs, and swap counterparties that are neither SDs nor MSPs. The Commission also approved proposed revisions that, among other things, streamline the requirements for reporting new swaps, define and adopt swap data elements that harmonize with international technical guidance, and reduce reporting burdens for reporting counterparties that are not SDs or MSPs.

This proposed rule has a 90-day comment period following approval by the Commission.

Reopening the Comment Period for the Proposed Rule: Certain Swap Data Repository and Data Reporting Requirements (Part 49 Verification)

The Commission unanimously approved the reopening of the comment period for the proposed rule Certain Swap Data Repository and Data Reporting Requirements that was published in the Federal Register on May 13, 2019. The proposed rule amends certain regulations applicable to swap data repositories, reporting counterparties, and other market participants. The proposed amendments would, among other things, update requirements for SDRs to verify swap data with reporting counterparties, update requirements to correct swap data errors and omissions, and update and clarify certain SDR operational and governance requirements.

The comment period will be reopened for 90 days ending on May 20, 2020. This will allow market participants to comment on this proposed rule in conjunction with the two proposals approved today.

All three measures are part of the Commission’s efforts to improve the quality, accuracy, and completeness of the data reported to the Commission. They are also intended to streamline data reporting, and clarify obligations for market participants.

Additional information on these rulemakings, including statements of the Chairman and the Commissioners, is available here.

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Speech by CFTC Chairman Heath P. Tarbert:

February 20, 2020

Data is the lifeblood of our markets.  Yet for too long, market participants have been burdened with confusing and costly swap data reporting rules that do little to advance the Commission’s regulatory functions.  In the decade-long effort to refine our swap data rules, we have at times lost sight of Sir Isaac Newton’s wisdom: “Truth is ever to be found in simplicity, and not in the multiplicity and confusion of things.”

Overview

Simplicity should be a central goal of our swap data reporting rules.  After all, making rules simple and clear facilitates compliance, price discovery, and risk monitoring.  While principles-based regulation can offer numerous advantages, there are areas where a rules-based approach is preferable because of the level of clarity, standardization, and harmonization it provides.  Swap data reporting is one such area.[1]

As it stands, swap data repositories (SDRs) and market participants have been left to wade through Parts 43 and 45 of our rules on their own.  We have essentially asked them to decide what to report to the CFTC, instead of being clear about what we want.  The result is a proliferation of reportable data fields designed to ensure compliance with our rules—but which exceed what market participants can readily provide and what the agency can realistically use.  These fields can run hundreds deep, imposing costly burdens on market participants.  Yet for all its sprawling complexity, the current data reporting system omits, of all things, uncleared margin information—thereby creating a black box of potential systemic risk.[2]

And that just describes CFTC reporting.  As it stands today, a market participant with a swap reportable to the CFTC might also have to report the same swap to the SEC, the European Securities and Markets Authority (ESMA), and perhaps other regulators as well.  The global nature of our derivatives markets has led to the preparation and submission of multiple swap data reports, creating a byzantine maze of disparate data fields and reporting timetables.  Market participants should not incur the costs and burdens of reporting a grab-bag of dissimilar data for the very same swap.  That approach helps neither the market nor the CFTC: conflicting data reporting requirements make regulatory coordination more difficult, preventing a panoramic view of risk.

Today we take the first step toward changing this.  I am pleased to support the proposed amendments to Parts 43 and 45 of the CFTC’s rules governing swap data reporting.[3]  The proposals simplify the swap data reporting process to ensure that market participants are not burdened with unclear or duplicative reporting obligations that do little to reduce market risk or facilitate price discovery.  If the amendments are adopted, we will no longer collect data that does not advance our oversight of the swaps markets.

In fact, the Part 45 proposal includes a technical specification that identifies 116 standardized data fields that will help replace the many hundreds of fields now in use by SDRs.  We are also proposing to harmonize our swap data reporting requirements with those of the SEC and ESMA.  Harmonization would remove the burdens of duplicative reporting while painting a more complete picture of market risk.  At the same time, the proposed changes to Part 43 would enhance public transparency as well as provide relief for end users who rely on our markets to hedge their risks.  Our swaps markets are integrated and global; it is time for our reporting regime to catch up.

Simplified Reporting

Today’s proposals advance my first strategic goal for our agency: strengthening the resilience and integrity of our derivatives markets while fostering their vibrancy.[4]  Simplified reporting is critical to the CFTC’s ability to monitor systemic risk.  While SDRs now require hundreds of data fields in an effort to comply with Parts 43 and 45 of our rules, uncleared margin has been noticeably absent.  If finalized, Part 45 will require the reporting of uncleared margin data for the first time.  This will significantly expand our visibility into potential systemic risk in the swaps markets.

A related problem we address today involves inconsistent data.  SDRs currently validate swap transaction data in conflicting ways, causing market participants to report disparate data elements to different SDRs.  Today’s proposals include guidance to help SDRs standardize their validation of swap data reports, shoring up the resilience and integrity of our markets.

Simplifying the reporting process will also enhance the regulatory experience for market participants at home and abroad, which is another strategic goal for the agency.[5]  We have heard from those who use our markets that the complexity of our existing reporting rules creates confusion, leading to reporting errors.[6]  This situation neither serves the markets nor advances the agency’s regulatory purpose.  Indeed, data errors can frustrate transparency and price discovery.

Our proposals today reflect a hard look at the data we are requesting and the data we really need.  The proposals provide the guidance needed to collapse hundreds of reportable data fields into a standardized set of 116 that truly advance our regulatory objectives.  If adopted, this would reduce burdens on market participants and provide technical guidance to ensure they are no longer guessing at what we require.  Clear rules are easier to follow, and market participants will no longer be subject to reporting obligations that raise the costs of compliance without improving the resilience and integrity of our derivatives markets. Just as we are reducing requirements where they are not needed, we are also enhancing them where they are.  This is the balanced approach sound regulation demands.

Regulatory Harmonization

Today’s proposals also improve the regulatory experience by harmonizing swap data reporting where it is sensible to do so.[7]  There is no good reason for a swap dealer or other market participant to report hundreds of differing data fields to multiple jurisdictions for the very same swap transaction.  This situation imposes high costs with very little benefit.

While we should not harmonize for the sake of harmonizing,[8] we can reap real efficiencies by carefully building consistent data reporting frameworks.  The proposals would harmonize our swap data reporting timelines with the SEC by moving to a “T+1” system for swap dealers, major swap participants, and derivatives clearing organizations.  We would also remove duplicative confirmation data and lift the requirement that end users provide valuation data.

Harmonization also helps the CFTC realize our vision of being the global standard for sound derivatives regulation.[9]  We have long been a leader in international swap data harmonization efforts, including by co-chairing the Committee on Payments and Infrastructures and the International Organization of Securities Commissioners (CPMI-IOSCO) working group on critical data elements (CDE) in swap reporting.[10]  The purpose of the working group is to standardize CDE fields to facilitate consistent data reporting across borders.  Our proposals today would bring this and related harmonization efforts to fruition by incorporating many of the CDE fields and a limited number of CFTC-specific fields into new Part 45 technical specifications.  Incorporating the CDE fields would sensibly harmonize our reporting system with that of ESMA.  As a result, the proposals would advance the CFTC’s important role in bringing global regulators together to form a better data reporting system.

The proposals also would harmonize swap data reporting in several other important respects.  First, we propose adopting a Unique Transaction Identifier (UTI) requirement in place of the existing Unique Swap Identifier (USI) system, as provided for in the CPMI-IOSCO Technical Guidance.[11]  Adopting a UTI system would provide for consistent monitoring of swaps across borders, improving data sharing and risk surveillance.  The proposals would also remove the requirement that market participants report duplicative creation and confirmation data, and would adopt reporting timetables that are consistent with those of ESMA and other regulators.[12]  These are reasonable efforts that will improve the reporting process, while shoring up the CFTC’s position as a leader on harmonization.

Enhanced Public Transparency

I am also pleased to support our proposals today because they enhance clarity, one of the four core values of our agency.[13]  Streamlining the Part 45 technical specification is intended, in part, to reduce unclear and confusing data reporting fields that do not advance our regulatory objectives.  But clarity demands more: we must also ensure we are providing transparent, high-quality data to the public.[14]

Part 43 embodies our public reporting system for swap data, which provides high-quality information in real time.  Providing transparent, timely swap data to the public is critically important to the price discovery process necessary for our markets to thrive and grow.  Enhanced public transparency also ensures that market participants and end users can make informed trading and hedging decisions. 

The CFTC’s current system for public reporting is considered the global standard.  Even so, it can be improved.  Although post-priced swaps are subject to unique pricing factors that affect the “public tape,”[15] they are nonetheless reported after execution just like any other swap.  It is of little value for the public to see swaps reported without an accurate price, or any price at all.  To remedy this data quality issue and improve price discovery, we are proposing that post-priced swaps now be reported to the public tape after pricing occurs.

The current reporting system for prime broker swaps has led to data that distorts the picture of what is actually happening in the market.  Currently, Part 43 requires that offsetting swaps executed with prime brokers—in addition to the initial swap reflecting the actual terms of the trade between counterparties—be reported on the public tape.  Reporting these duplicative swaps can hinder price discovery by displaying pricing data that includes fees and other costs unrelated to the actual terms of the parties’ swap.  Cluttering the public tape with duplicative swaps is at best unhelpful, and at worst confusing.  To the public, it could appear as though there are twice as many negotiated, arms-length swaps as there actually are.  Today’s proposals would solve this problem by requiring that only the initial “trigger” swaps be publicly reported.

Relief for End Users

Finally, the proposals would help make our derivatives markets work for all Americans, another of the CFTC’s strategic goals.[16]  While swaps are viewed by many Americans as esoteric products, they can nonetheless fulfill an important risk-management function for end users like farmers, ranchers, and manufacturers.  End users often lack the reporting infrastructure of big banks, and may be unable to report data as quickly as swap dealers and financial institutions.  Indeed, demanding that they do so can impair data quality, frustrating our regulatory objectives.

If finalized, today’s proposals will no longer require end users to report swap valuation data.  It would also give them a “T+2” timeframe for reporting the data we do require.  The proposals would therefore remove unnecessary reporting burdens from end users relying on our swaps markets to hedge their risks.  In addition, by providing sufficient time for end users to ensure their reporting is accurate, the proposals would also improve the quality of data we receive.

Conclusion

It is time for the Commission to reform our swap data reporting rules.  Sir Isaac Newton realized long ago that simplicity can often lead to truth.  It does not take an apple striking us on the head to realize that simplifying our swap data reporting rules to achieve clarity, standardization, and harmonization will inevitably make for sounder regulation.

 
[1] See Heath P. Tarbert, Rules for Principles and Principles for Rules: Tools for Crafting Sound Financial Regulation, Harv. Bus. L. Rev. (forthcoming 2020) (“A principles-based regime is often a poor choice where standard forms and disclosures are heavily used, as principles do not offer the needed precision.”).

[2] Requiring margin in the uncleared swaps markets ensures that counterparties have the necessary collateral to offset losses, preventing financial contagion.  With respect to non-cleared, bilateral swaps, in which there is no central clearinghouse, parties bear the risk of counterparty default.  In turn, the CFTC must have visibility into uncleared margin data to monitor systemic risk accurately and to act quickly if cracks begin appear in the system.

[3] We are also re-opening the comment period for Part 49, which relates to SDR registration and governance.

[4] See Remarks of CFTC Chairman Heath P. Tarbert to the 35th Annual FIA Expo 2019 (Oct. 30, 2019), available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opatarbert2 (announcing the core value of “clarity” and defining it as “providing transparency to market participants about our rules and processes”).

[5] See id. (identifying the CFTC’s strategic goals).

[6] The problem is compounded by the allowance for “catch-all” voluntary reporting, which creates incentives for market participants to flood the CFTC with any data that might possibly be required.  Paradoxically, this kitchen-sink approach can so muddy the water as to undermine a fundamental purpose of data reporting: to create a transparent picture of market risk.

[7] Harmonizing regulation is an important consideration in addressing our increasingly global markets.  See Opening Statement of Chairman Heath P. Tarbert Before the Open Commission Meeting on October 16, 2019, available at https://www.cftc.gov/PressRoom/SpeechesTestimony/heathstatement101619 (“The global nature of today’s derivatives markets requires that regulators work cooperatively to ensure the success of the G20 reforms, foster economic growth, and promote financial stability.”).

[8] Id. (“To be sure, as my colleagues have said on several occasions, we should not harmonize with the SEC merely for the sake of harmonization.  I agree that we should harmonize only if it is sensible.”).

[9] See CFTC Vision Statement, available at https://www.cftc.gov/About/Mission/index.htm.

[10] The CFTC also co-chaired the Financial Stability Board’s working group on UTI and UPI governance.

[11] The CPMI-IOSCO harmonization group has requested that regulators implement UTI by December 31, 2020.  I believe it is important for the CFTC to meet this deadline, which has long been public and reflects input from our staff.  The remainder of our proposals today are subject to a 1-year implementation period.

[12] Today’s proposals move to a “T+1” reporting deadline for swap dealers, major swap participants, and derivatives clearing organizations and to a “T+2” system for other market participants.

[13] See CFTC Core Values, available at https://www.cftc.gov/About/Mission/index.htm.

[14] One of the issues we are looking at closely is whether a 48-hour delay for block trade reporting is appropriate.  We are hopeful that market participants will provide comment letters and feedback concerning the treatment of block trade delays.

[15] Many post-priced swaps are priced based on the equity markets, and do not have a known price until the equity markets close.

[16] See FIA Expo Remarks, supra note 5.

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For a further commentary on these proposed rule changes you can also view this blog post from DRS ALS: https://drs-als.com/cftc-keeps-on-kiss-ing/