In line with the Dodd Frank Act’s crackdown on the derivatives markets, the Commodity Futures Trading Commission (CFTC) has proposed rules establishing swap data recordkeeping and reporting requirements for counterparties to pre-enactment swaps (those executed prior to enactment of the Dodd Frank Act) and transition swaps (those entered into between the enactment date and the future effective date for the final rules). The proposals are aimed at providing clarity to the market about any potential discrepancies between the current status quo and incoming data requirements as part of the derivatives reform package; hence it focuses on closing any loopholes with regards to historical data.
CFTC chairman Gary Gensler explains: “The proposed rule provides clarity concerning what records must be kept and what data must be reported to swap data repositories with respect to these historical swaps. The rule proposes limited recordkeeping requirements for counterparties to historical swaps. For swaps in existence on or after the date of publication of the proposed rule, counterparties would be required to keep records of specified, minimum primary economic terms for the swaps.”
The proposals have been submitted to the Federal Register and will be published shortly, at which point, firms will have 60 days in which to respond. The focus of any response should take into account the costs and data management impacts of these proposals, given that they apply new recordkeeping requirements to historical data sets. The rule, for example, proposes limited recordkeeping requirements for counterparties to historical swaps. For swaps in existence on or after the date of publication of the proposed rule, counterparties would be required to keep records of specified, minimum primary economic terms for the swaps.
The rules are also designed to ensure that data needed by regulators concerning historical swaps is available to them through swap data repositories beginning on the effective date for swap data reporting. Accordingly, counterparties required to report this data are also permitted to use third party providers to facilitate this process. Data quality focused compliance solution vendors will, no doubt, be clamouring for this business.
In terms of data standards, the CFTC states: “In reporting swap data to a swap data repository, each reporting counterparty shall use the facilities, methods, or data standards provided or required by the swap data repository to which the counterparty reports the data. Swap data repositories may permit reporting entities and counterparties to use various facilities, methods, or data standards, provided that its requirements in this regard enable it to meet the CFTC’s requirements with respect to data maintenance and transmission of data to the CFTC.”
One can therefore expect data standards and quality metrics to be another point of contention, in line with the other discussions that have been going on with regards to this (see the Office of Financial Research development, for example). The recent publication of its joint study with fellow regulator the Securities and Exchange Commission (SEC) on the feasibility of adopting new algorithmic codes to identify complex and standardised derivatives is a case in point.
The CFTC and SEC are also hosting a joint public two day roundtable on 2-3 May at the CFTC HQ in Washington. During which the regulators will discuss the schedule for implementing final rules for swaps and security-based swaps under the Dodd Frank Act. The reform package gives the CFTC and SEC certain flexibility to set effective dates and a schedule for compliance with rules implementing Title VII of the Act, which involves oversight of swaps and security-based swaps, so that market participants have time to develop the policies, procedures, systems and processes needed to comply with the new regulatory requirements.
Public comments on Title VII have helped inform the SEC and CFTC as to what requirements can be met sooner and which ones will take more time. The roundtable is intended to supplement the comments received to date and help inform the regulators as they proceed with rulemaking. To this end, it will provide the public with the opportunity to comment on whether to phase implementation of the new requirements based on factors such as: the type of swap or security-based swap, including by asset class; the type of market participants that engage in such trades; the speed with which market infrastructures can meet the new requirements; and whether registered market infrastructures or participants might be required to have policies and procedures in place ahead of compliance with such policies and procedures by non-registrants.
The roundtable is expected to include panel discussions of: compliance dates for new rules for existing trading platforms and clearinghouses and the registration and compliance with rules for new platforms, such as swap and security-based swap execution facilities, and data repositories for swaps and security-based swaps; compliance dates for new requirements for dealers and major participants in swaps and security-based swaps; implementation of clearing mandates; compliance dates for financial entities such as hedge funds, asset managers, insurance companies and pension funds subject to a clearing mandate and other requirements; and considerations with regard to non-financial end users.