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CFTC Shorts, Part 3

 49 Problems but verification ain’t one

This article is the third part of the ‘CFTC Shorts’, a series of bite-sized discussions around various aspects of the proposed changes to Dodd-Frank Part 43, 45 & 49. Alan McIntyre, Senior BA and Industry Relations Lead at RegTek.Solutions drills into various aspects of the reporting requirements and identifies some of the challenges that firms will need to consider.

Apologies to Jay-Z for the atrocious pun on his lyrics. The 49 here refers to the Part 49 of the Dodd-Frank Act that governs how Swap Data Repositories (SDRs) function. Indeed, as discussed in my previous article, the CFTC recently published proposed revisions to the Part 49 rules, alongside a Request for Comment consultation.

Side note, but our colleagues at the Commission have been busy this month. They have also shared an updated draft of the technical specification for the reportable fields under Part 43 (the real-time price discovery reporting) and Part 45 (the swap transaction data reporting). Although this latter document is not fully in the public domain yet as it has been shared only with the trade associations and the SDRs for discussion within their various working groups. We’ll take a look at these in upcoming articles.

Back to Part 49. The proposed rules cover areas as diverse as the SDRs’ opening times, the disclosure requirements for transfers of equity in the SDRs, but importantly (for us) two topics relating to the regulator’s data quality agenda:

  • Validations: SDRs to implement validations on the swap data and ultimately reject data that does not comply with the standards set out by the CFTC
  • Verification regime: A verification regime where the reporting firms will assess the data held at the SDRs and either attest or dispute the accuracy of the data and undertake corrections

Show me what you got

This verification regime proposal is proving to be contentious and has caught the attention of the industry. The proposal can be summarised as follows:

  • SDRs to regularly send an Open Swaps Report containing all the data held for that reporting firm to each reporting firm. Weekly for the big boys (SD/MSP/DCO reporting counterparties) and monthly for the smaller firms (non-SD/MSP/DCO reporting counterparties)
  • Reporting firms required to reconcile the reported data against their internal books and records for each open swap
  • Reporting firms have 48 hours (SD/MSP/DCO) / 96 hours (non-SD/MSP/DCO) to attest or dispute the completeness and accuracy of the Open Swaps Report to the SDR
  • Should any errors or omissions be uncovered, based on the Open Swaps Report or other, reporting firms have three working days to undertake corrective actions to remediate the data
  • Any firm unable to remediate incomplete or erroneous data within the 3-day period will be required to notify the CFTC in writing and provide a plan for how they intend to remediate the data

Washington state of mind

The intentions are clear and the CFTC explains its motivation in the accompanying request for comment discussion paper. The following quote is in the context of a discussion around SDRs currently having an obligation to confirm the accuracy of the data with both counterparties:

because counterparties do not currently have a corollary obligation to respond to the SDRs’ notifications, SDRs have adopted rules based on the concept of negative affirmation: reported swap data is presumed accurate and confirmed if a counterparty does not inform the SDR of errors or omissions or otherwise make modifications to a trade record for a certain period of time.

The CFTC clearly wants to replace negative or assumed affirmation with explicit affirmation. The regulator is also putting the onus on the Reporting Party to verify the data on behalf of both itself and the non-reporting counterparty. In a section discussing the practical difficulties of the SDRs trying to verify the data with non-reporting counterparties that are often not connected to the SDRs they state:

The Commission’s proposed revisions to § 49.11 and § 45.14(a)83 should provide more detail on the responsibilities of SDRs, working in conjunction with reporting counterparties, to verify the accuracy and completeness of swap data. As described in the discussions of proposed § 49.11(b)-(d) below, the Commission is proposing that SDRs only verify swap data with reporting counterparties because the Commission believes this would be the most practical approach to verification.

Represent

However, not everyone is in agreement with the proposed regime and some are concerned that the requirements might be too harsh. Senior banking executives we’ve discussed this with have observed that the 3-day turnaround time is perhaps a little unrealistic. There seems to be less qualms around the reconciliation which they do currently as it’s required in Dodd-Frank. But detecting issues, investigating the causes and remediating within 3 business days sounds tough.

Concerns have also been raised that the requirement to notify the Commission of any errors that could not be corrected within the three days is too draconian. Considering the complexity and scale of the swap data that the big swap dealers are required to report, some fear that these proposed requirements could result in a continuous cycle of firms notifying the CFTC and providing updates on previous notifications. Essentially, reporting firms could be tracking a list of ongoing issues with the US regulator.

There is also the perspective of the regulator itself. Does the Commission really want to find itself dealing with frequent 3-day rule breach reports from many of the SEFs, DCMs and Reporting Parties?

And finally let’s spare a thought for the SDRs. There is the substantial task of building the infrastructure to process and track the various attestations of “it’s all good man” and disputes of “oops, I did it again”. And does the obligation to receive a verification response from every reporting firm mean that the SDRs are put in the awkward business position of chasing their member firms when no response is received?

The consultation period closes on the 29th of July. Given the energy and discussions this proposal is generating, it will be interesting to see what the responses are and where this leads. I wouldn’t be at all surprised if it gets watered down somewhat. But in the crazy world of transaction reporting and the seemingly endless list of demands put on the reporting firms, then likewise I wouldn’t be too surprised if it goes ahead as planned. Time will tell.

Peace.

It’s all good man.

Sorry Jay!


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