Initial proposals by the US Commodity Futures Trading Commission (CFTC) to amend swap data regulations raises several concerns, say lawyers and consultants.
“The proposal is somewhat vague as to the process for how swap data repositories must give the CFTC the open swap data reports, and I think commissioner Stump made some good points on that. If you are an SDR, vague requirements are not ideal, as it forces you to do things on an ad hoc basis, as opposed to building specific processes,” says Nihal Patel, special counsel at law firm Cadwalader, Wickersham & Taft’s financial services group.
“There is no question that if there is a new required report, it will be a build for SDRs. With that said, I think if you are an SDR, and you look at this proposal in full, you’ll see a lot of things that are good for you. The CFTC, as a general matter, sought to make the SDR compliance burdens more streamlined and more straightforward to comply with,” he says.
On April 25, the CFTC called for feedback after it approved the first of three proposed rules to amend SDR and data reporting requirements. The proposal is part of the roadmap to achieve high quality swap data set out by the CFTC’s Division of Market Oversight in July 2017.
The amendments will update: requirements on SDRs to verify swap data with reporting counterparties; requirements to correct swap data errors and omissions for SDRs, reporting counterparties, and other market participant; and clarify SDR operational requirements to ensure that data is available to the CFTC and the public as required by the Commodity Exchange Act.
Under the paperwork reduction act section of the proposal, the CFTC said it estimated a one-time burden of “170,200 hours to build reporting verification systems, and an ongoing annual overall hours burden of 17,020 hours to maintain the reporting counterparty verification systems.”
The commission went on to estimate that reporting counterparties would incur an initial “one-time burden of 100 hours to build, test, and implement their verification systems based on SDR instructions.”
Commissioner Dawn Stump stated she was “uncomfortable with the lack of details and nebulous description of certain obligations in many parts of the proposal,” and questioned the “underlying assumptions driving these policy changes, and the promulgation of this rulemaking in isolation and without corresponding changes to other swap data reporting rules.”
For Karan Kapoor, principal consultant at Capco, the current state of swaps data quality reported to SDRs is at best inconsistent and causes significant hurdles for the CFTC officers to deliver the desired objectives of the regulation.
“One of the key objectives of Title VII of the Dodd Frank Act was to improve the data transparency of the multi-trillion dollar swaps market,” said Kapoor, by email. “However, due to it being a technically complex reporting requirement, and the implementation specifications being open to interpretation - notably in areas of extra territoriality and reporting formats - implementation has been inconsistent across the industry. This has created significant gaps that need to be closed to ensure full regulatory compliance.”
Concerns also remain with different stances taken on swap data quality by US regulators, with commissioner Stump stating that the proposed rule is taking “an approach that is the opposite of, and in direct contrast to, the SEC’s thinking on the same issue.”
On December 19, the SEC asked for comment on its proposed rules on risk mitigation techniques for uncleared security based swaps. In the proposed rulemaking the regulator said it believed it “to be an appropriate time to revisit and request comment on an issue previously identified in connection with the rules applicable to the registration and ongoing regulation of SDRs,” and specifically the need to “confirm with both counterparties to the security-based swap the accuracy of the data that was submitted.”
“A lot of the transaction reporting regulation, it’s original source has been somewhat fragmented with different objectives. Each of the regulators, and maybe more so with the CFTC and SEC, they are looking at different product types, and product sets. Therefore, they might different priorities in what they want reported,” says Daniel Percy-Hughes, consultant at Synechron.
Cadwalader, Wickersham & Taft’s Patel points out that any variation will have substantial consequences.
“The SEC [swap] rules are not live at this point. Harmonizing a set of rules which currently apply with those that are purely theoretical is a bit difficult. Unless the two regulators are going to come out with the exact same rules, or jointly adopt rules, there are going to be some differences, and any difference between these rules may be significant for market participants who have to comply with both of them.”