Advanced Notice of Proposed Rulemaking on Protection of Cleared Swaps Customers before and after Commodity Broker Bankruptcies
I support the advance notice of proposed rulemaking concerning protection of collateral of customers entering into cleared swaps. There has been much public input into these matters, but I think it is appropriate to have a formal ANPR soliciting input on a number of options and questions on how best to protect customers’ collateral in the event of another customer’s default. This is particularly important as we move forward to implement Congress’s mandate that for the first time standardized swaps must be cleared. I am hopeful that we will hear from a broad range of market participants, including clearinghouses, futures commission merchants, pension funds, asset managers and other end-users, on the costs, benefits and feasibility of various approaches to protecting customers’ money.
Protection of Collateral of Counterparties to Uncleared Swaps
I support the proposed rulemaking concerning protection of collateral of counterparties to uncleared swaps. The proposal includes important protections for end-users when entering into bilateral or customized swaps. The proposal follows the Congressional direction that end-users must have a choice to have any initial margin that they post with a swap dealer to be kept in a segregated account and with a third party custodian. The proposed rules would protect market participants while promoting the financial integrity of the marketplace. The proposal also includes necessary housekeeping details with regard to the Bankruptcy code.
Real Time Public Reporting
I support the proposed rulemaking to implement a real-time public reporting regime for swaps. The proposed rules are designed to fulfill Congress’s direction to bring public transparency to the entire swaps market, both standardized and customized swaps. This post-trade transparency will enhance price discovery and liquidity while ensuring anonymity and protection for large trades in appropriate cases. Per Congress’s direction, the proposal requires real time reporting for swap transaction and pricing data to occur as soon as technologically practicable for trades other than trades of large notional size or block trades. Congress mandated that these trades be reported without delay regardless of whether they are standardized or customized.
With regard to block trades or trades of large notional size, the proposed rule includes two important features: a time delay and a method to report the large sizes. With regard to the delay, the proposed rule includes a 15-minute delay on standardized blocks. This compares to the futures marketplace, which currently has a five-minute delay for blocks, and the equities marketplace, which has an even shorter delay. With regard to customized trades of large notional size, the proposal asks a series of questions as to whether a similar delay of 15 minutes would be appropriate for interest rate, currency and other financial swaps and what delays may be appropriate for customized large trades referencing physical commodities. The second important feature with regard to block trades or trades of large notional size is a reporting method that transactions greater than $250 million notional amount – even the very largest of trades – will just be reported as being greater than $250 million. This will protect anonymity and promote the liquidity of these large trades.
The proposal on real time reporting includes the methods by which to calculate what a block trade is across the market for various swap instruments. This will be based on data collected by the swap data repositories in each of the asset classes. Lastly, the proposal includes an initial implementation date of January 2012 to provide time for the initial setting of block sizes based on market data and time for market participants to prepare for such real time reporting requirements.
Real time post-trade reporting is critical to promoting market integrity and to benefit the investing and hedging public. When corporations, municipal governments, farmers and merchants seek to hedge their risk, they will benefit from seeing an accurate picture of where similar transactions are being priced concurrent with their decision-making. It is an essential ingredient of well-functioning markets. Such transparency increases liquidity and enhances the price discover function of the market.
Registration and Regulation of Swap Data Repositories
I support the proposed rulemaking to establish registration requirements and regulations of swap data repositories. This proposal would implement Congress’s mandate that all swaps – whether cleared or uncleared – be reported to a swap data repository registered with the Commission. Registration will enable the Commission to monitor swap data repositories for compliance with the Dodd-Frank Act and Commission regulations. The proposal implements Congress’s direction that regulators would have direct access to information maintained by swap data repositories. The proposal requires swap data repositories to verify the accuracy and completeness of all of the swaps data it accepts. The proposed rule also includes a requirement that swap data repositories would receive notifications with regard to non-financial end-users hedging or mitigating commercial risk. The proposal also includes important features where swap data repositories will facilitate real time reporting of swaps transactions. Lastly, the proposal includes provisions for swap data repositories to aggregate certain information for regulators and the public.
Swap Data Recordkeeping and Reporting Requirements
I support the proposed rulemaking to establish swap data recordkeeping and reporting requirements for registered entities and counterparties involved in swaps. The proposed rule is intended to ensure that complete, timely and accurate data concerning all swaps is available to the Commission and other regulators. The proposed rule requires that data be consistently maintained and reported to swap data repositories by swap dealers, major swap participants, designated contract markets, swap execution facilities, derivatives clearing organizations and futures commission merchants. As swaps exist over a period of days to sometimes years, the proposal includes requirement for the reporting of data upon the transaction and to continue over the lifecycle of the swap. Another important component of the proposed rulemaking is that there will be required unique identifiers for swaps, counterparties and products. This will enhance operational efficiency for market participants and improve market surveillance for regulators.
Last Updated: January 18, 2011