Monday, November 12, 2012

DTCC Says CME Federal Court Challenge to CFTC Swap Reporting Regulations Could Disrupt the Entire Dodd-Frank Swaps Regulatory Regime

In a letter to CFTC Chair Gary Gensler, the Depository Trust & Clearing Corporation warned that the Chicago Mercantile Exchange’s federal court action to enjoin CFTC rules on the reporting of cleared swaps data to swap data repositories threatens to dismantle and disrupt the entire swaps regulatory regime mandated by the Dodd-Frank Act in order to preserve the CME’s exclusive access to data that it acquires through its role as a derivatives clearing organization. In the view of the DTCC, this commercial gain would come to the detriment of market participants who have spent an entire year planning, and investing hundreds of millions of dollars, to comply with these rules. Importantly, it would also frustrate the ability of regulators to rely on swap data repositories to identify and mitigate global systemic risk to financial markets.

The letter pointed out that the CME’s challenge comes 15 months after the finalization of rules for swap data repositories and ten months after the adoption of the final swap data recordkeeping and reporting rules became effective. According to the DTCC, this lengthy delay suggests that CME’s challenge is prompted not by concerns with the costs of reporting data on cleared swaps to swap data repositories, but in response to swap counterparties, those responsible for swap transaction reporting, choosing to report to swap data repositories other than CME’s captive swap data repository. A DTCC subsidiary is provisionally registered to operate a swap data repository pursuant to CFTC regulations for interest rate, credit, equity.

The DTCC has significant concerns with the potential negative consequences of a judicial challenge or CFTC action to remove the necessity for a legal dispute. The Commission cannot undertake changes to its rules, which have been published for nearly a year, and relied upon for business planning, without conducting adequate notice, comment, and consideration of the costs and benefits of amending its rules. The DTCC said that it is considering its possible responses to the suit and resulting Commission activity, including possible judicial recourse.

More specifically, the DTCC said that the regulatory oversight purposes of the Dodd-Frank Act will be frustrated if, through tying or bundling practices, derivatives clearing organizations unilaterally report to captive swap data repositories, resulting in fragmented data across multiple swap data repositories.  In rejecting counterparty reporting instructions, derivatives clearing organizations subvert the intent of the CFTC’s regulation requiring all swap data for a given swap to be reported to a single swap data repository. For purposes of market oversight and prudential Regulation, emphasized the DTCC, it is critical that swap data is reported to and maintained by one swap data repository throughout the life of the derivatives contract.

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