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NFA in the Frame to Take Over Derivatives Registration from the CFTC, But What of Regulatory Follow up?

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Last week, Reference Data Review noted that the Commodity Futures Trading Commission (CFTC) is contemplating ceding control over data registration requirements to another body, namely industry group the National Futures Association (NFA). The result of such an action, which itself is being driven by the regulator’s funding woes, could mean that power and influence is back in the hands of the industry rather than the regulators. Could this be a precursor of things to come for the Office of Financial Research and how will this impact the take up of standards, given the lack of regulatory follow up?

The NFA is an independently funded body that focuses on brokers and firms active in futures and currency markets, and it has an ongoing partnership with the CFTC with regards to oversight of these particular markets. Taking on the CFTC’s registration responsibilities would mean an extension of its remit to the wider OTC derivatives markets and would therefore require investment in the NFA’s resources to be able to cope with administering the registration process. To this end, Karen Wuertz, senior vice president for Strategic Planning and Communications at the NFA, has already indicated that the association will be “ready and able” to take over any responsibility that the CFTC passes its way and will “ramp up” its capabilities accordingly.

However, beyond these practicalities, the NFA is not a regulator, it is a self-regulatory organisation and therefore does not hold the same clout over the industry as the CFTC. What impact would handing power back to the industry by outsourcing to an industry funded body have on the data standardisation push within the Dodd Frank reforms? Data managers have long called for regulators to step into the fray to help them champion their cause within their own financial institutions via regulatory compulsion. But if the regulators aren’t able to follow up on implementation, will the industry really take action?

Moreover, if this is what is going on within the CFTC, is the Securities and Exchange Commission (SEC) contemplating a similar move? Under the Dodd Frank Act, the SEC and CFTC are to share regulatory jurisdiction of the OTC derivatives market, with the SEC focused on security linked swaps and the CFTC focused on the other types of swaps. As the SEC’s budget has also been nixed, will it also farm out its responsibilities? What about the Office of Financial Research?

Last week, the regulators published proposals regarding new requirements for firms to provide their counterparties with documentation detailing key information about derivatives trades, with a view to increasing electronic communication of this data. If neither regulator can take action against those that do not comply, what is the use of introducing the new requirements in the first place?

While the industry waits for the debate to start on this topic, we might as well look at the reference data aspects of the current proposals as highlighted by CFTC chairman Gary Gensler during a speech at the George Washington School of Law last Friday.

On the subject of the introduction of daily valuation for the OTC markets, he said: “One of the key chapters from the 2008 financial crisis was when large financial players, including AIG, had valuation disputes. The Dodd Frank Act directly addresses many of these issues by requiring daily valuation of swaps. For cleared swaps, clearinghouses have to publicly say where they are marking their positions. For uncleared swaps, swap dealers and major swap participants have the obligation to provide the mid-market pricing of outstanding swaps to their counterparties on a daily basis. Furthermore, when swap dealers and major swap participants are valuing the swaps, our proposed rulemaking requires those entities to use as objective data as possible, such as settlement prices as reported by clearing houses.”

On the subject of data aggregation, he stated: “Both trading venues and clearing houses will have to provide aggregate trading data to the public on a daily basis. Trading venues will be required to make aggregate data available on trading volume, open interest and pricing. Clearing houses will be required to make aggregate data available on daily trading volume, open interest and mark to market settlement prices. The CFTC also is required to publish a regular report on trading and clearing by swap categories. The Dodd Frank Act requires that data to be released at least every six months, but we hope to release data more frequently than that. We are looking to promote the transparency of the swaps market in ways similar to what we have done for many years through aggregate reporting of futures trading data.”

Obviously, these changes (if they happen) will have a significant impact on the practices of valuations teams, with increased frequency of data and reporting becoming a key issue. The increased volume and required transparency of these data requirements will (hopefully) force firms to invest further in this function, or face the data quality consequences.

Gensler’s full speech is available to view here.

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