Friday, August 05, 2016

ISDA seeks delay in dissemination of security-based swap information under Regulation SBSR

By John Filar Atwood

The International Swaps and Derivatives Association (ISDA) has asked the SEC to permit a temporary delay in the public dissemination of security-based swap (SBS) information by security-based swap data repositories (SDRs) under Regulation SBSR to prevent reporting entities from having to build new delay mechanisms into their reporting architectures. Without the delay, Regulation SBSR could further delay the reporting of SBS information and negatively affect overall data quality, according to the ISDA.

Regulation SBSR allows reporting entities in an SBS transaction a 24-hour delay from reporting to an SDR after the execution of a SBS transaction. However, Section 902(a) of the regulation requires SDRs to disseminate trade information “immediately upon receipt.” Under the rule, the SDR has no flexibility to delay dissemination consistent with the 24-hour delay. As a result, ISDA said, reporting entities intending to use the 24-hour delay must independently adapt their internal reporting processes and policies to withhold transmission of trade information to the SDR, or risk the immediate public dissemination of this information.

Intended benefits. The ISDA noted that the Regulation SBSR requirements are intended to provide insight into market perspectives on the liquidity of different types of SBS transactions based on the interval at which a reporting side sent data for its SBS to an SDR for immediate public dissemination. That information could potentially form part of the data that the SEC intends to collect and analyze during the interim period to help it establish its block thresholds and reporting delays for SBS transactions (the Block Rules).

However, the ISDA claimed that the reality is that the SEC is not likely to obtain the desired information regarding SBS liquidity since reporting sides and the market infrastructure providers that facilitate reporting on their behalf (together, the reporting entities) will not be able to build sophisticated dissemination delays that take into consideration the relative liquidity of SBS transactions. Doing so would be very difficult and costly, according to the ISDA, and would create a negative commercial impact and impair market liquidity if done in an inconsistent manner.

Inconsistent with Canada. ISDA also noted in its rulemaking petition that the requirement that SDRs disseminate information immediately upon receipt is inconsistent with the existing regulatory requirements for public transaction reporting established by the CFTC and securities regulators in Canada. The rule also is inconsistent with the current functionality of SDRs that offer services in those jurisdictions, and regulatory reporting systems of all market participants in those jurisdictions.

The CFTC and Canadian regulators require reporting “as soon as technologically possible,” according to the ISDA, so reporting entities have not built internal delay mechanisms for reporting. The ISDA believes that the SDRs’ requirement under Section 902(a) effectively obligates reporting entities to build new delay mechanisms into their reporting architectures in order to prevent their SBS data from being publicly reported in advance of the 24-hour deadline for reporting allowed under Section 901(j).

The ISDA said that its members believe that that public dissemination delays are necessary to protect the stability and longevity of the SBS market. In order to avail themselves of this important protection, the ISDA added, reporting entities must build internal delay mechanisms.

Even if firms develop their own internal delay mechanism, the ISDA claimed, the process of scaling products by liquidity based on staggered reporting intervals applied on a trade-by-trade basis is a complex task that may depend on facts and circumstances of a single trade and/or more subjective views of a current market. Consequently, the ISDA expects each reporting entity to establish a single interval at which it reports its trades, which means the SEC is unlikely to obtain information on the perspectives of reporting entities on the relative liquidity of SBS to aid the establishment of its Block Rules.

Fingerprinting. Another threat to anonymity will result from differences in the intervals at which a reporting entity sends SBS to the SDR for immediate public dissemination, according to the ISDA. Since the SBS data of each reporting entity will be publicly disseminated at a consistent point of delay after execution, it argued, the identity of the reporting side would be discoverable by its counterparties who will recognize their SBS transactions against a party on the public report and would be able to deduce that other SBS disseminated at the same interval have been reported by, or on behalf of, that same reporting side. This “fingerprinting” would compromise a reporting side’s anonymity regarding its trading activity and impact its ability to hedge in a timely manner and at a fair price, the ISDA claimed.

The ISDA believes that the requirement for SDRs to comply with Section 902(a) creates a number of serious, unintended consequences that make it difficult and onerous for reporting sides to comply with Regulation SBSR, for market infrastructure providers to support SBSR and for SDRs to maintain data integrity. Firms should not have to give up their right to a public dissemination delay in order to meet their obligations to report timely in other jurisdictions and maintain data that is accurate and reconcilable, the ISDA added.

The problems caused by Section 902(a) would be entirely eliminated if SDRs were allowed to accept SBS data without disseminating it to the public immediately, the ISDA argued, and instead hold the data to be publicly disseminated per the reporting deadline in Section 901(j). The ISDA asked the SEC to amend Section 902(a) to allow SDRs to publicly disseminate a transaction report of an SBS, or a life cycle event or adjustment due to a life cycle event, upon the deadline specified in Section 901(j) or as subsequently provided in the Block Rule.

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