MiFIR/MiFID II preparedness has been top of mind at every firm I’ve visited recently, but that could be about to change, especially in light of recently proposed delays in its implementation. Meanwhile, The SEC’s Regulation SBSR for the reporting and dissemination of Security-Based Swap Information threatens to be equally time-consuming and costly to participants as MiFID II.
Despite the fact that both jurisdictions fall under Dodd-Frank, there are key differences between SEC and CFTC rules that will require separate processes and controls in order to report to each body.
As currently proposed, the SEC requires the following:
- Who reports: SEC rules introduce the concept of “reporting side” for each deal, which is a similar concept to Reporting Counterparty under CFTC, although as currently proposed this will extend beyond security-based swap dealers and major security-based swap participants to non-US entities if US personnel are involved in the Arrangement, Negotiation, and Execution (ANE) of a trade, as well as clearing agencies and broker dealers, including swap execution facilities (SEFs). There are also reporting implications on the buy-side – see below.
- What to report: The scope of covered transactions that need to be reported to the SEC is a superset of CFTC, and encompasses inter-affiliate trades and compression of non-cleared SBS.
- Identifiers: A whole new set of composite Unique Identifier Codes (UICs) will be in effect, and will include a new product ID taxonomy and firm-specific branch and trader IDs, amongst other fields. Product IDs can only be shared between two SBS that can be netted or compressed.
- Impact on the Buy Side: Certain UIC fields for the non-reporting side, which typically will be the buy-side, still need to be reported, including fields like Branch ID and Trader ID. Each Swap Data Repository (SDR) needs to establish how these fields will get to them, and even if passed through to the SDR by the Sell Side, this will require systems, processes, and controls that do not exist today.
- When to report: Trades will need to be reported to the SEC twenty-four hours after the trade is completed, and thus resembles the reporting timeliness requirements under EMIR. This is different than the requirement under CFTC for Real Time messages, which are to be reported As Soon As Technically Possible (ASATP). Also, since the public details of trades will be disseminated as soon as the SDR receives it, reporting firms may choose to delay reporting trades to the SDR until the end of the twenty-fourth hour – for competitive reasons.
- Backloading: All SBS that were “alive” the day that Dodd Frank went into effect – July 21, 2010 – need to be loaded into the SDR, and all of those that are still alive will be disseminated to the SEC and public. This will be a major effort at most firms.
These requirements are far from straightforward, which is why we have built a (Report-it.Trade) software business to address the needs for G20 regulation as well as in the US. Even so, and while there have been many conferences and articles – in fact, a whole cottage industry – dedicated to MiFID II readiness, I am beginning to wonder if firms realise how daunting SEC reporting could be and why we aren’t seeing more on the topic.
I expect that to change in the weeks ahead, as reporting is one of the three key planks of Title VII of the Dodd-Frank Act, along with execution and clearing. In both these cases, the impact on the industry has been significant. Electronic execution of swaps has leaped in the past two years, and now the majority of swaps are cleared by the buy-side. I expect the same impact for reporting, which is why this sleeping giant is about to be woken.
By Lloyd Altman, Global Head of Validate.Trade, Risk Focus