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CFTC Issues Advisory and Request for Comment on Swap Data Reporting
Practical Law Legal Update w-001-1034 (Approx. 6 pages)
CFTC Issues Advisory and Request for Comment on Swap Data Reporting
by Practical Law Finance
| Published on 22 Dec 2015 • USA (National/Federal) |
The CFTC issued two recent releases on swap data reporting rules under Title VII of the Dodd-Frank Act: a staff advisory reminding swap dealers of certain swap data reporting obligations, and a request for comment on new draft technical specifications for certain swap data reporting elements. Both releases relate primarily to swap data reporting under CFTC regulations Part 43 (real-time reporting) and Part 45 (regulatory reporting).
The CFTC issued two recent releases on swap data reporting rules under Title VII of the Dodd-Frank Act:
- A staff advisory issued by the CFTC's Division of Swap Dealer and Intermediary Oversight reminding swap dealers and major swap participants of certain swap data reporting obligations (see Staff Advisory, below).
- A request for comment on new draft technical specifications for certain swap data reporting elements (see Request for Comment on Data Reporting Elements, below).
These releases appear designed to address widespread compliance violations in the area of data reporting, as noted by CFTC Chairman Timothy Massad at a recent derivatives industry conference (see Legal Update, CFTC Chairman Announces Upcoming Rules, Warns on Enforcement: Improving Data Reporting).
Both releases relate primarily to swap data reporting under CFTC regulations Parts 43 and 45. Part 43 of the CFTC regulations addresses real-time public swap data reporting under Title VII of the Dodd-Frank Act. Part 45 addresses regulatory “SDR” reporting under Title VII. For more detail, see Practice Note, US Derivatives Regulation: CFTC Swap Data Reporting and Recordkeeping Rules.
Staff Advisory
On December 17, 2015, the CFTC's Division of Swap Dealer and Intermediary Oversight issued a staff advisory reminding swap dealers (SDs) and major swap participants (MSPs) of their swap data reporting obligations under Regulation 23.204 (17 CFR § 23.204) and Regulation 23.205 (17 CFR § 23.205). These regulations require SDs and MSPs to report information and data in accordance with Part 45 and Part 43 of the CFTC's regulations, respectively.
The Division identified a number of recurring reporting failures by SDs and MSPs under these regulations, including:
- Reporting of transactions with readily apparent errors (i.e., unrealistic notional values of $1 quadrillion).
- Submitting incomplete trade reports missing crucial information such as a counterparty's legal entity identifier (LEI), the US person field, or the counterparty election of a clearing exception field.
- Submitting duplicative information to swap data repository (SDR) databases.
- Submitting reporting information with incorrectly calculated or reported notional values.
- Habitually late submissions of data.
In order to ensure compliance with Parts 43 and 45, and to avoid the common errors discussed above, the CFTC is advising SDs and MSPs to consider:
- Creating automatic verification systems to ensure reported data does not contain any errors before submission.
- Ensuring compliance with the accuracy requirements by using an automated process to identify errors (and make corrections) during the 48 hour SDR data-accuracy confirmation period set out in Regulation 49.11.
- Reviewing, correcting, and resubmitting any data an SDR flags as potentially erroneous and, possibly, establishing procedures to investigate errors in hopes of preventing further instances.
- Reviewing established processes for implementing system changes and updates to ensure compliance with corresponding impacts to the reporting system.
- Remembering that the reporting obligations of CFTC Regulations 43.3(e)(ii) and 45.14 (which require correction of erroneous or incomplete data) apply to both new transaction and those occurring before the advisory;
- If the SD or MSP uses a third-party service provider to transmit reporting data to an SDR, remembering that the SD or MSP remains responsible for its compliance requirements under these regulations.
The CFTC took care to note that nothing in the advisory should be interpreted to excuse prior violations or limit its ability to pursue any related actions.
Request for Comment on Data Reporting Elements
On December 22, 2015, the CFTC submitted for public comment a set of draft technical specifications for certain swap data reporting elements (comment deadline: March 7, 2016). These include:
- New standards for certain swap data elements already required under Part 45 (and related CFTC regulations).
- New elements not currently required to be reported.
- Questions directed at the market on certain related issues.
More specifically, the data elements include:
- Counterparty data fields, including:
- data elements related to the ultimate parent and ultimate guarantor of a swap (but not the entire corporate organization;
- a "Counterparty Dealing Activity Exclusion Type" data element to help the CFTC determine whether a counterparty has exceeded the swap dealer de minimis threshold. For more information, see Practice Note, US Derivatives Regulation: Swap Dealer and MSP Threshold Calculations;
- Special Entity (SE) and Utility Special Entities data elements to help the CFTC determine whether parties trading with an SE should be registered as a SD. For more information, see Practice Note, US Derivatives Regulation: Swap Dealer and MSP Threshold Calculations: De Minimis Exemptions from Designation as Swap Dealer (SD) and Security-based Swap Dealer (SBSD): Swaps Entered into with "Special Entities";
- a prime brokerage indicator to allow the CFTC to calculate swap transaction volume without risking double coverage where a prime broker (a party that acts as a credit intermediary) enters into an existing trade between an executing SD and a client.
- Product data fields, including:
- a standardized representation of the Floating Rate Index data element which would establish uniformity in SDR data and allow the CFTFC to properly aggregate interest rate swaps by the underlier of those swaps;
- a request for comment on how best to account for (and identify) uniformity issues with offshore currencies (such as the Chinese renminbi/yuan), which are not uniformly identified in currency swap data;
- a request for comment on the issue of intellectual property rights relating to proprietary credit indices that may prevent an SDR from transmitting all underlying data, weighed against a potential restraint on innovation and competition that could result from mandating the use of a specific proprietary identifiers.
- Certain pricing data fields, including type, currency, and par spread. In this context, "price" refers to the value exchanged between parties for a swap.
- Notional amount data fields, such as "Notional Amount" and "Notional Currency" for each leg or cash flow stream of a transaction, to allow for more accurate reporting so the CFTC would no longer have to infer the notional amount for each leg/stream of a hybrid transaction.
- Additional fixed payment data fields which include upfront fees, brokerage fees, novation fees, and which can account for transactions with multiple legs/payment streams.
- Options data fields, such as option type and related data fields (such as currency, premium amount, etc.) on both the overall structure and individually for each separate leg of a transaction, where applicable.
- Underlying order data fields including price discovery mechanisms, order type, time in force, quantity type, consumer type, and timestamps to allow the CFTC to better assess how the implementation of a trade-execution (exchange-trading) requirement affects the market and its participants.
- Package transactions data fields. Package transactions are transactions involving at least one swap subject to the trade execution requirement and at least one additional swap or financial instrument. For more information on clearing and regulation of package swaps under Dodd-Frank, see Legal Update, CFTC Further Delays Package Swaps Exchange Trading.
- Clearing data fields, including:
- the addition of a “Mandatory Clearing Indicator” data element to explicitly note whether a swap is subject to mandatory clearing under section 2(h) of the Commodity Exchange Act (7 U.S.C. § 2(h)); and
- explicit identification of the type of clearing exemption a counterparty claims.
- These are designed to work in tandem with the proposed Part 45 Amendments, which look to clarify Part 45 rules and their interactions with Part 39 (see Legal Update, Amendments to Part 45 Cleared Swap Data Reporting Proposed by CFTC).
- Periodic reporting to ensure up-to-date information regarding:
- swap reconciliation with a counterparty;
- the next reset date for the transaction (i.e., the mechanism that allows an interest rate swap with floating rates to reset at fixed intervals);
- valuation and related data elements;
- collateral or margin by grouping swaps by "netting sets" based on either: (i) ongoing cash flows in the same currency on the same payment date, or (ii) net payments due upon the same Event of Default or Termination Event.
Update: The CFTC has extended the public comment period on the draft technical specifications to March 7, 2016.
For details on the data fields that must currently be reported under Parts 43 and 45, see The Dodd-Frank Act: CFTC Swap Data Reporting Required Data Fields Checklist.