Monday, April 29, 2019

CFTC proposes first rules on the road to achieving high quality swaps data

By Brad Rosen, J.D.

The CFTC has approved a proposed rule geared to improve the quality of swap data and to update and streamline regulations related to swap data repository (SDR) operations and governance. The proposed rule is the first rulemaking to come out of the agency’s report, Roadmap to Achieve High Quality Swaps Data (the “Roadmap”), a comprehensive review of swap reporting regulations issued by the CFTC’s Division of Market Oversight (DMO) in July 2017.

Key elements of the rulemaking. The main elements of the proposed rule update various requirements and include:
  • SDRs verifying swap data with reporting counterparties;
  • correcting swap data errors and omissions for SDRs, reporting counterparties, and other market participants;
  • SDR governance regulations; and
  • SDR operational requirements to ensure that data is available to the CFTC and the public as required by the CEA.
CFTC commissioners weigh in on the proposed rule. Four of the five commissioners provided prepared statements setting forth their respective views on the proposed rule. Two commissioners, Dawn Stump and Rostin Behnam, concurred with the rulemaking, each expressing concerns and reservations, although for diametrically opposed reasons. As of press time, Commissioner Brian Quintenz had not issued a statement addressing the proposed rule.

Chairman Giancarlo provides historical context. Chairman Giancarlo noted that the proposed rule changes, and the other changes described in the Roadmap, will result in more complete, more accurate, and higher-quality data available to the CFTC and to the public, will streamline data reporting, and will help the CFTC perform its regulatory responsibilities.

Giancarlo also provided some historical context, observing that a critical component of the 2008 financial crisis was the inability of regulators to assess and quantify the counterparty credit risk of large banks and swaps dealers. To address this shortcoming, the Dodd-Frank Act gave the CFTC broad responsibility to enhance regulatory transparency and price discovery for market participants through trade reporting to SDRs.

In 2011 and 2012, the CFTC adopted rules for swap data reporting, recordkeeping, and SDRs. In the chairman’s view, however, these initial rules lacked technological detail and specification. As a consequence, he directed the DMO to outline a series of steps to improve data reporting requirements. Some of these are contained in the Roadmap and serve as a foundation for the current proposed rulemaking.

Berkovitz notes improvements in the verification process are called for. Commissioner Berkovitz, while recognizing some of the successes existing reporting rules have achieved, notes that proposed rule amendments identify other areas where the CFTC’s existing swap data reporting rules are not working as effectively as they could. Specifically, the commissioner pointed to the proposed rule’s treatment of swap data verification and the need to promptly correct errors or omissions contained in previously reported data. He observed that the proposed rule would clarify and strengthen the obligations of SDRs and reporting counterparties by requiring SDRs to provide reporting counterparties with regular reports on open swaps to “verify the accuracy and completeness of swap data reported to SDRs.” In turn, reporting counterparties will be required to respond affirmatively by indicating that the records in the reports they receive are accurate, or otherwise correct any errors or omissions.

Stump expresses concerns about the imposition of immense additional burdens on SDRs. Commissioner Stump stated her disagreement with some of the policy and procedural choices in proposed rulemaking and questioned certain underlying assumptions driving the policy changes. She expressed her discomfort with the lack of details and nebulous description of certain obligations in many parts of the proposal, which in her view will make informed public comment difficult. In particular, Commissioner Stump disagrees “with imposing immense additional burdens on swap data repositories and all types of reporting counterparties” without commensurate streamlining of regulatory obligations in the rest of the CFTC’s swap data reporting rule set.

Behnam seeks flexibility but opposes any rollback of Dodd-Frank initiatives. Conceptually, Commissioner Behnam prefers viewing the proposed rule as a part of the Commission’s ongoing duties to regularly review its regulations to increase efficiencies and avoid unintended consequences, rather than as a first step in implementing the roadmap. Behnam further noted that even as the Commission endeavors to provide surgical flexibility and a more principles-based approach with regard to regulating swaps activities, he will continue to oppose any roll backs of Dodd-Frank initiatives.

The CFTC is seeking comments on the proposal. The comment period will end 75 days after the proposal’s publication in the Federal Register. All comments will be posted on CFTC’s website.