In line with the Dodd-Frank Act’s push to get derivatives onto exchanges and centrally cleared, the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) have set up a joint study to examine the feasibility of adopting new standardised computer readable codes to identify complex and standardised derivatives. The request for comment will soon be published in the Federal Register (much like the Office of Financial Research’s entity identification proposals) and firms must respond before the year is out: the deadline is 31 December 2010.
This is all in line with section 719(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which establishes an interagency working group, comprised of the CFTC and the SEC to conduct this study.
As recently noted by Goldman Sachs’ vice president of product data quality Jim Perry, the central clearing of these products will require the development of new standard instrument identifiers for all classes of derivatives, as well as the development of legal entity identifiers. Thus far, the CFTC has focused on the swaps market to this end, but this request for comment is much broader than that remit, encompassing both standardised and complex derivatives.
The regulators indicate that the request for comment is therefore expected to assist in the preparation of the study on the feasibility of requiring the derivatives industry to adopt standardised computer readable algorithmic descriptions that may be used to describe these derivatives and calculate net exposures. These algorithmic descriptions are intended to facilitate automated analysis of individual derivative contracts and to calculate net exposures to complex derivatives.
The group will also consider the extent to which the algorithmic descriptions, together with standardised and extensible legal definitions, may serve as the binding legal definition of derivative contracts. Ergo they will become the de facto standard for the detailed identification of derivatives within the market.
Among the questions posed, is a reference to current practices with regards to derivatives “ontologies” that are currently being used to define and describe derivatives positions and transactions. Given Perry’s comments at FIMA last month, the likely response of many will be that such computer readable descriptions are not being used at all, let alone shared across counterparties.
The regulators are also asking whether current standards such as FpML or FIX could be extended for this purpose and whether this is a feasible way to tackle the challenge. The request for comment also asks of the potential costs of introducing such a data standard; the response to which is likely to be “very high”.
Comments to the 41 questions included in the request for comment (which can be downloaded below) may be submitted electronically through the CFTC’s comments online process. All comments received will be available on the CFTC’s website here.
The SEC has also recently published its proposals for the registration of swaps within data repositories for public comment, including the requirement for “uniform data standards” for the reporting of these instruments. This follows on from the recent series of regulatory roundtables that have considered the data implications of these proposals. The roundtables included in-depth discussions of the challenges inherent in entity and instrument identification in a market with low levels of standardisation and the SEC document therefore reflects the need to tackle these.
The regulator is seeking to understand all of the data impacts of the introduction of repositories in the swaps markets and is therefore seeking industry comment on the proposals and questions it poses. It indicates that data tagging is potentially on the cards for the swaps market in the near future (in the form of XBRL): “Requiring the information to be tagged in a machine readable format using a data standard that is freely available, consistent, and compatible with the tagged data formats already in use for Commission filings would enable the Commission to review and analyse effectively form swaps data repository submissions.” However, it does ask the question whether XBRL is the most suitable format, or if something else (other XML-based tags, for example) is preferred.