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How Can Firms Prepare for the CFTC Rewrite?

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By Leo Labeis, CEO, REGnosys.

The Commodity Futures Trading Commission’s (CFTC) rewrite of swaps reporting rules – known as the ‘CFTC Rewrite’ – is one of several upcoming changes to global trade reporting regimes. Earlier this year, it extended the deadline for financial institutions to comply from May 25, 2022, to December 5, 2022.

The amendments, which became effective in January 2021, aim to improve data quality and the new deadline has afforded firms valuable time to review their reporting practices.?One of the challenges facing financial institutions when it comes to compliance is the lack of standardisation across regions. This has led to a duplication of processes, increasing the cost, complexity and operational risk of trade reporting.

Thankfully, greater collaboration across the industry is now addressing this fundamental issue. The Digital Regulatory Reporting (DRR) programme has emerged as an important tool to facilitate the compliance process, with an initial focus on the CFTC Rewrite.

The CFTC Rewrite and the drive for standardisation

The transparency requirements for OTC derivatives transactions, first enacted as part of the global financial reform at the G20 Summit in 2009, triggered multiple overlapping requirements across jurisdictions.

The US was the first to implement those changes with the Dodd Frank Act. The current CFTC requirements have been in place since 2012 and other jurisdictions followed in subsequent years. A decade on, these reporting regimes are now being reviewed and the CFTC Rewrite is the first major overhaul within the G20.

The amendments are born out of the drive to achieve greater harmonisation between jurisdictions and higher data quality. The CPMI-IOSCO working group of global regulators has been at the heart of this shift. In 2018, the group published its Critical Data Elements (CDE) to work alongside other common standards including the Unique Product Identifier (UPI) and Unique Trade Identifier (UTI).

The first phase on the CFTC Rewrite this year adopts the CDE and UTI, with implementation of the UPI to follow in 2023.??Although not every regulator is adopting these standards in precisely the same way, it is undoubtedly a significant improvement on the existing disjointed landscape.

Tackling the CFTC requirements with DRR 

DRR is a global industry-led programme to mutualise the cost of interpreting and complying with reporting requirements. Rather than each firm performing their own interpretation, DRR allows them to standardise that interpretation, encode the rules into a ‘model’ and store it in a digital, openly accessible format. As such, it is a valuable mechanism to mitigate any divergence between jurisdictions.

DRR also digitises the regulators’ sample trade scenarios that they may provide in their technical specifications (usually as PDF documents) to illustrate the workings of the rules, as is the case with the CFTC Rewrite. DRR stores those scenarios as synthetic data samples which firms can use to test their implementations and demonstrate that it performs as expected against the rules.

On top of the common rules and the CFTC-specific logic, extensions are built for reporting into each of the trade repositories.?Historically, each trade repository required reporting firms to submit data in a specific format that they determined, before applying their own data transformation for consumption by the regulator. The mandating of the ISO 20022 format, consistent with a push for more standardisation, changes that process by shifting the responsibility from trade repositories to the reporting firm.

Going forward, each firm will be required to report to the trade repositories directly. Although, in the CFTC Rewrite case, that mandate has been postponed to 2023, DRR will ease that process in future by also standardising the transformation into ISO 20022.

From testing to implementation

The CFTC Rewrite build in DRR started in late 2021 and is now largely complete with over 90% of the CFTC reportable fields covered. The DRR model is now undergoing a quality assurance process to ensure it is a complete and accurate representation of the rules. Once trade associations sign off on the model, reporting participants will be able to use DRR as a resource for their internal production build. In Q3, further testing will ensure that the content the model is producing is in line with the trade repositories’ expectations.

As firms enter into the last stretch of their own build, they must now prepare for a full end to end test in the context of their implementation choice. Firms can leverage DRR by either building their own system on it or deploying a third-party platform that does. In either case, firms should aim to begin rigorous user acceptance testing as early as possible to ensure it performs against the requirements and is fully embedded ahead of the December deadline.

For years, firms have been trying to report the same set of data but in slightly different ways because of the fragmented nature of their systems and siloed approaches. DRR is changing this, equipping the sector with the necessary capabilities to work together in open source. Firms which invest now and implement this new approach will have a strong foundation not only for the upcoming CFTC Rewrite, but also for subsequent amendments in the years to come.

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