Commodity Futures Trading Commission (CFTC) commissioner Scott O’Malia certainly hasn’t been shy of speaking out about the serious challenges that lie ahead of the regulator as it seeks to introduce new swaps data repositories and related rules, and this week he added data ownership issues to his list of concerns. Speaking during a public discussion on the subject, O’Malia noted that there is currently a lack of clarity around who will actually own the swaps data and the regulator’s reticence to discuss the issue is not helping matters.
“Between the swap counterparties, the swap execution facility, the derivatives clearing organisation or the swaps data repository, it remains unclear as to who owns and has rights to make commercial use of the actual data. I recognise that given the commercial use limitations proscribed in Part 49 of the Commission’s rules, we are seeking to temporarily avoid this issue by speaking in terms of possession, as opposed to ownership, of the data. However, given that old adage that possession is nine tenths of the law, I am not so confident we are dodging any bullets by refraining to speak on this issue,” O’Malia warned his fellow commissioners.
He also added: “Additionally, the final rules before us today do not address the role that swaps data repositories will play in the public dissemination of real-time swap data and in determining the appropriate minimum block trade sizes.”
Although he didn’t directly reference data vendors in his speech, the ownership and control issue has been a bone of contention for this particular corner of the financial services community for some time. Liability concerns about who will be responsible for this data have been raised by industry participants, after all the rule grants swaps data repositories with the power to disseminate some of this data out to the public.
On this note, commissioner Gary Gensler said: “The rule implements congressional direction that the Commission and other regulators have direct access to the information maintained by swaps data repositories. It requires swaps data repositories to verify the accuracy and completeness of all of the swaps data they accept. It also contains provisions to permit swaps data repositories to aggregate certain information for regulators and the public. This rule will enhance transparency in the swaps market and help reduce systemic risk.”
The monitoring of systemic risk is a laudable aim and, as noted by O’Malia, the regulator is convinced that these repositories will provide “for the first time, a reliable means for price discovery” for the swaps markets. However, the fact that these repositories will be reporting some of this data in aggregate form out to the public (in whatever form that takes) is a potential can of worms for the vendor community, especially when commercial concerns have not been addressed and there is not yet full clarity on the types of data this will include.
On this note, O’Malia indicated that (once again) the regulation is likely to be an amorphous creature due to its principles rather than prescriptive approach and the fact that the CFTC is still in the process of finding its feet in this process. He admitted that the regulator has “limited experience in regulating entities similar to swaps data repositories” and the re-evaluation of various rules once they have been implemented may be required. Not a great start for those hoping for clarity over the coming months on data reporting requirements and potential commercial impacts.
He is convinced, however, that he can turn the swaps data repository oversight efforts to his own advantage in his campaign to get more investment into technology at the CFTC itself. He reckons that the rules will compel the regulator to invest in: data and technology links to these repositories; internal data aggregation systems; and automated surveillance systems for both market and credit events. “It is my expectation that the finalisation of the swaps data repository registration rule today is the end that will get the Commission to focus on the means by refocusing its priorities on expanding our technological capabilities,” he said.
O’Malia was not the only commissioner to raise concerns about technology challenges. Commissioner Jill Sommers also noted the need to be more prescriptive in its guidance about how these repositories should monitor, screen and analyse swaps data in terms of technology capabilities. “The rules also fail to address how the Commission will handle the aggregation of data for surveillance and regulatory purposes, or how those duties will be divided between the Commission and swaps data repositories,” she added.
The division of responsibilities regarding data will be especially important in a cross border environment, Sommers said, calling for a clear process and memorandums of understanding to be drawn up to this end. After all, extra-territoriality debates have raged across the regulatory community over recent months with regards to the establishment of these new infrastructures.
Much like O’Malia, Sommers is also keen for some of the outstanding data ownership and control issues to be tackled before moving ahead with implementation: “Other issues related to core functions that swaps data repositories will perform, such as real-time reporting, record keeping requirements and data standards are intended to be addressed in later rulemakings. It would have made more sense to me to consider these related rules as a group so entities that are considering registering as swaps data repositories would know what specific functions and duties will be required of them. Additionally, I have concerns about how we will access the swap data provided to swaps data repositories which I believe is a critical part of our role as a regulator. I understand that this is not our final bite at the apple for swaps data repositories but wish we would have considered a more holistic approach to this new structure.”
Commissioner Bart Chilton added that the regulator needs to be “mindful” that there is clarity as to “when and how” the CFTC will be applying these rules. Unfortunately, for the time being, it seems that the ‘what’ exactly the rules will constitute is still up for debate.