February 10, 2014
I am pleased to call the 11th TAC meeting to order since we reconstituted it in July 2010. I thank all of our TAC participants for joining us here today after the January 21 meeting was snowed out. I appreciate everyone’s willingness to accommodate the change in date.
I would like to acknowledge that our new Acting Chairman Mark Wetjen is here with us today. Chairman Wetjen has shown a great interest in our technology issues and a real willingness to ensure that the data we are collecting will be used in a thorough and automated manner. I was pleased to join with Chairman Wetjen and Commissioner Chilton a few weeks ago to announce that the Commission is taking concrete steps to address the challenges we face in optimizing our data.1
Specifically, on January 21, the Commission announced the formation of a cross-divisional data team that will focus on identifying problems faced by each division and developing solutions to resolve problems with the Commission’s regulatory data. The data team will also solicit comments from market participants on recommended rule changes to the Commission’s data rules. Based on this input, the data team will make written recommendations on a corrective path forward. Until now, no one in the Commission has taken ownership to fix the problems. This has now changed.
Enhancing the Commission’s swaps reporting rules will improve data quality, minimize confusion regarding reporting workflows, and increase standardization.
In addition, the Commission staff will continue to work on the data standardization effort, led by the Office of Data and Technology. The first phase of this work has been reported to TAC,2 but much work remains to harmonize many more fields and asset classes.
Today’s TAC agenda is packed with three very important and timely topics that are also at the top of the Commission’s policy agenda.
Panel I -- Data: Where Does the Commission Stand and How Do We Fix What’s Broken?
First, we will hear from a collection of the Commission’s division directors who have critical market oversight responsibilities, as well as our Office of Data and Technology and our new Chief Economist. They will discuss where the Commission has been successful in utilizing swap data repository data, identify areas that are not working, and explain where changes must be made.
In thinking about our goals, I reviewed the Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions (CPSS / IOSCO) Final Report issued in January 2012 entitled, “Report on OTC derivatives data reporting and aggregation requirements.”3 Significantly, the report identifies key reporting standards and goals for data reporting, aggregation, and sharing among regulators.
The report also establishes several high level objectives for data utilization that the Commission should be able to achieve. These objectives include:
1. Assessing systemic risk and financial stability
2. Conducting market surveillance and enforcement
3. Supervising market participants
4. Conducting resolution activities
5. Bringing greater transparency to OTC markets
While it is clear we have achieved objective 5 with a partially complete swaps data report and a real-time swaps data ticker, I believe we have a long way to go on the other fundamental data objectives.
Working hand-in-hand with the division directors, I want to better understand how we will tackle these key objectives, and further learn about the data priorities of each division and the progress being made to achieve these priorities.
Panel II -- Concept Release on Automated Trading
Our second panel will focus on a question that TAC has extensively discussed over the past three and a half years: What is the appropriate level of pre-trade functionality deployed by traders, futures commission merchants, and exchanges to protect market integrity against rouge trades which can cause market disruption?
The first TAC meeting4 addressed this topic and by the third TAC meeting,5 there were recommendations for minimum standards.6 Subsequently, we established a Subcommittee on Automated and High Frequency Trading to define high frequency trading and explore other policy questions related to automated trading.7
Today, we will discuss the Concept Release on Risk Controls and Systems Safeguards for Automated Trading Environments.8 The comment period closed on December 11, 2013,9 but my colleagues have generously agreed to reopen the comment period until February 14, 2014 to include this panel discussion and any additional comments. We have received a variety of comments and ideas regarding these standards, and I have asked four witnesses and Commission staff to participate on this panel. I also encourage our TAC members, many who submitted comments on the concept release, to share their views on this matter.
I recognize that there are very strong opinions regarding automated trading and I believe that we will have a robust discussion.
Panel III – Made Available-to-Trade Determination
Finally, the third panel will address swap execution facilities (SEFs) and the recent Made Available-to-Trade (MAT) determinations.
The Division of Market Oversight (DMO) has deemed certified several MAT submissions for standard interest rate benchmark swaps and credit default swaps. While I am supportive of the MAT determinations for the benchmark contracts, I do not believe that the appropriate research and consideration has been given to package transactions tied to benchmark contracts. I believe that we can transition many of these contracts to mandatory trading in the near future, but we must first complete some additional analysis.
As part of our research and analysis, we are focusing panel III’s discussion on package transactions and the Commission staff will hold a roundtable on February 12.
While I am pleased that the Commission staff is working to provide relief from the mandatory trading requirement for package transactions, I did raise serious concerns with the MAT process in my January 16 statement that was tied to DMO’s announcement that it deemed certified Javelin’s MAT determination.10 My concerns have nothing to do with Javelin as a company or with their offering. They just happened to be the first mover to submit an application, which exposed the flaws in the MAT process. In many respects, it is appropriate for a company called Javelin to be the first mover, or rather the “tip of the spear.”
DMO’s memo to the Commission on the MAT determinations did not include any discussion of the types of package transactions that would be impacted by the MAT determination, nor did it address the concerns regarding technical or operational readiness or the jurisdictional issues involving these transactions.
The only insight provided in the staff memo regarding commenters’ requests for temporary relief for package transactions was the following statement: “[S]uch requests are not appropriate for consideration within the scope of the Commission’s process for reviewing a MAT determination.” (emphasis added).
Thankfully, the memo went on to say, “[t]herefore, the Division is taking these comments into consideration and may provide a future response or guidance as appropriate.” However, that was the extent of the discussion.
While I am frustrated that we are conducting the analysis on package transactions after making the MAT determinations, I am pleased that this TAC meeting will initiate the process for identifying and resolving the issues associated with such transactions.
I would like to see the market continue to benefit from the efficiency of package transactions and encourage the trading of such products on exchange. So, let's begin the process to figure out how to make that happen.
1 Press Release PR6873-14, CFTC to Form an Interdivisional Working Group to Review Regulatory Reporting, January 21, 2014, available at http://www.cftc.gov/PressRoom/PressReleases/pr6837-14.
2 This report is available at http://www.cftc.gov/ucm/groups/public/documents/file/dataharmonization.pdf.
3 The final report is available at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD366.pdf.
4 July 14, 2010 TAC meeting.
5 March 1, 2011 TAC meeting.
6 These recommendations are available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/dfsubmission/tacpresentation030111_ptfs2.pdf.
7 The subcommittee presentations regarding high frequency trading and automated trading from the October 30, 2012 TAC meeting are available at http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/tac103012_wg1.pdf;
8 78 FR 56542 (proposed Sep. 12, 2013).
9 All comment letters on the concept release are available through the Commission’s website at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1402.
10 The statement is available at http://www.cftc.gov/PressRoom/SpeechesTestimony/omaliastatement011614.
Last Updated: February 10, 2014