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CFTC keeps on KISS-ing

The CFTC is back with another proposal to refine the spirit of Dodd-Frank Regulations and amend real-time public reporting regulations. Chairman Tarbert opened his speech by stating that data is ‘the lifeblood of our markets’ and went on to essentially outline the CFTC’s new vision for how this this data should be delayed. Under Commodity Exchange Act section 2(13)(a) ‘real time public reporting’ refers to ‘reporting data relating to a swap transaction, including price and volume, as soon as technologically practicable after the time at which the swap transaction has been executed’. The purpose of this reporting is to make pricing data available to the public in a form, and at such times as the Commission deems appropriate to enhance price discovery.

On one hand, the regulations set out the categories of swaps that are subject to near real time public reporting (Part 43), who the transactions are to be reported to (SDRs), and when the real-time data is to be reported (‘as soon as technologically possible after execution’). On the other hand, parts 43 – 45 leave vague the exact kind of data that the CFTC wants to see. Appendix A to Part 43 lists, among others, an execution timestamp, start date, end date, underlying asset(s) and an indication of collateralisation as data fields that were to be submitted. In the early days of Dodd-Frank reporting this led to a data ‘Tower of Babel’ – resulting in vast amounts of irreconcilable, inconsistent data of severely limited utility for regulatory purposes. In order to make these data fields flexible so they could accommodate different types of swaps, market participants are still essentially deciding the kind of information they should be submitting to SDRs. The end result is that participants are submitting multiple data fields to ensure compliance, but the regulator is not able to manage them in an efficient way.  

To make matters more complicated, participants that engage in a swap that was reportable under the rules of the CFTC may also have to report the same swap to the SEC and ESMA. With each regulator having slightly different, and differentially detailed, requirements of the data fields they expect for submission, participants are left to do the same task more than once  and incur separate costs. The lack of regulatory coordination has severely hampered the ability to have an overview of global systemic risk.

The set of proposals being suggested by the CFTC aim to tackle these problems, primarily by amending Parts 43 and 45 of the rules and streamlining reporting requirements. In an ideal outcome, participants would no longer have to duplicate their reporting efforts and incur multiple costs, and regulators would all benefit from a harmonised approach.

The changes in the proposals are as follows:

  • Remove the reporting of the ‘mirror swap’

The proposal would see participants not having to report the ‘mirror swap’ – the offsetting swap designed to close out the market exposure of an existing swap position – as it is regarded as ancillary information that does little to aid price discovery. One may think that a dealer’s choice to hedge or not is highly useful and instructive information to the price discovery process – but the CFTC believes otherwise.

  • Extending deadlines for counterparties based on size

For larger counterparties, such as swap dealers, the proposal seeks to extend the reporting deadline to T+1, and to T+2 for smaller counterparties, such as end-users. The advantages of this approach are twofold – the deadlines will be more in line with other regulators, and will place the emphasis on improving the quality of swap data, rather than getting quick swap data.

  • Extends deadline for block trade reporting from 15 minutes to 48 hours

This extension has probably been the most debated amendment thus far. The proposal uses current data to recalibrate the scope of block trades (generally by increasing the size of a block trade so fewer transactions fall under the scope of block reporting) and to extend the reporting period delay to 48-hours, rather than the current 15 minute minimum. The rationale is that a smaller number of complex block trades could take more than 48 hours to hedge and therefore justify the delay. However, this large extension represents a substantial deviation from the ideal of near real time reporting and can hardly be said to aid price discovery.  

  • Submitting uncleared margin data

At present, uncleared margin data has not been required to be submitted, but one of the revisions to Part 45, if finalised, will require the reporting of uncleared margin data for the first time. This is in line with current reporting of collateral data; however if the parties are in scope for unclear margin regulations, margin will be exchanged, and it is difficult to see the utility of these new data fields.

  • Harmonising data fields

The proposal also aims to amend Part 45 guidance on data harmonisation – primarily by streamlining reportable fields into a standardised set of a mere 116 to reduce the burden on market participants. There is also clear intent to harmonise reporting requirements with those of the SEC and ESMA so that participants do not send similar data sets more than once.

The elements of the proposals that intend to reduce the reporting burden imposed on market participants, to clarify the scope of obligations and to harmonise, and streamline disparate data fields should clearly be welcome. However, the marked increases in reporting delays may seem more like a watering down of Dodd-Frank rather than a refinement.

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