April 9, 2013
Between Friday April 5th and today, Commission staff issued three no-action letters in connection with its swap reporting requirements for trade options by end users, swaps transactions between inter-affiliates and reporting obligations for both financial and non-financial (end users) entities under Parts 43 (Real Time Reporting), 45 (Regulatory Reporting) and 46 (Historic Swap Reporting) of the Commission’s regulations. 1 The trade option and inter-affiliate exemptions provided relief from reporting obligations under Parts 45 and 46. Both the trade option and inter-affiliate exemptions are for an indefinite period of time. The no-action letter issued today provides staggered dates of relief from Parts 43, 45 and 46 reporting for swaps by both financial and non-financial entities depending on the product at issue. While I support relief to provide end users with adequate time to comply with the rules, I am troubled by the arbitrary and ad-hoc manner in which this relief was provided. The application of date, product and participant distinctions makes compliance and implementation confusing for the end users.
The relief provided today for Parts 43, 45 and 46 fails to deliver on the request by end users for delay. End users based their request on very specific and unanswered concerns regarding the data reporting requirements.2 Despite acknowledging that end users do not have an IT infrastructure system that is comparable to the systems available to SD/MSP market participants,3 the Commission has declined to provide relief for the time period requested by end users to allow them to bring their IT infrastructure up to proper specification. Market participants sought a six months extension of time to bring their systems into compliance. Yet the no action letter issued today provides for phased implementation ranging from April 10th to October 31st of this year depending on the product and entity. Staff fails to provide any justification for the various reporting deadlines imposed in today’s letter.4
When Dodd-Frank was passed, Congress made clear that end users should suffer the least disruption to their operations and the smallest increase in regulatory costs. In a letter to Congressmen Barney Frank and Collin Peterson, Senators Blanche Lincoln and Christopher Dodd noted that the Dodd-Frank reforms should “not [be] punitive to the end users, … [the reforms should] encourage the management of commercial risk, and … build a strong but responsible framework for regulating the derivatives market.”5 One is hard pressed to see how these no-action letters follow that explicit mandate from Senators Lincoln and Dodd. This is only made more frustrating when one considers that end users played little if any part in the financial crisis of five years ago. To add insult to injury, it is unclear at this point, whether the Commission is even prepared to handle the new data on the current or delayed reporting schedule.
What is the Commission's Plan to Address its Own Data and Technology Challenges?
In addition to uncertainty that market participants face in complying with the swap reporting rules, the Commission is also facing its own challenges in analyzing the data provided by the three registered swap data repositories. Inconsistent and incomplete reporting, technology shortfalls and integration issues have created immense challenges for the Commission. Although, I am confident with time and attention the Commission can solve these data and technology challenges, at present, it is unclear when and how this will occur and if the Commission’s current hurdles will be resolved before the various compliance deadlines issued today come into effect.
Why Wait to Do the Right Thing?
The no-action letters on inter affiliate trades and trade options are effectively staff carve-outs of Commission promulgated rules. While I support the relief, I would prefer that the no-action letters provide temporary relief (not to exceed 1 year) during which time the Commission would re-propose changes to Part 45 to specifically address the reporting requirements for trade options and swaps between affiliated entities. In addition to making these two adjustments, the Commission should also codify in the amended rulemaking its position regarding the reporting requirements for cleared swaps by CCPs articulated in the Commission Statement accompanying CME's Rule 1001.6 Amending the existing rule provides everyone the opportunity to comment on the changes consistent with the Administrative Procedures Act while also placing all reporting requirements in the actual rule, as opposed to a patchwork of no-actions letters found on the Commission’s website. Finally, the Commission should re-propose Part 46 to specifically address how market participants should comply with Part 46 reporting obligations for swaps that have been submitted to, and accepted by, a clearing house for clearing.
The President’s Executive Orders Direct Us to Develop Clear Rules
In 2011, President Obama signed Executive Orders, directing all executive agencies to eliminate “outmoded regulations” with the goal of putting in place rules that “promote predictability and reduce uncertainty.”7 The Orders require agency regulations to be “accessible, consistent, written in plain language and easy to understand.” Clearly, Part 45 does not meet this standard. The Part 46 rules have also failed to clearly address what data will satisfy the reporting obligations of market participants that have novated, historic swaps that were entered into through an exchange of derivatives for a related position (EDRP).8
Our job as regulators is to utilize an open and transparent rulemaking process to promulgate clear rules that provide certainty for the market. Instead, we have resorted to an ad-hoc, opaque process that has left us with a patchwork of exemptions and interpretations that only confuses the market. Let's develop a strategy that first solves our own data and technology challenges and then phases in reporting for end users in a manner that is clear and cost effective. Failing to provide the necessary guidance and reasonable timetables certainly doesn’t comport with the President’s goals of improving regulation and regulatory review.
1 No-Action Relief for Swaps Between Affiliated Counterparties That Are Neither Swap Dealers Nor Major Swap Participants from Certain Swap Data Reporting Requirements Under Parts 45, 46, and Regulation 50.50(b) of the Commission’s Regulations, (http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-09.pdf), Staff No-Action Relief from the Reporting Requirements of § 32.3(b)(1) of the Commission’s Regulations, and Certain Recordkeeping Requirements of § 32.3(b), for End Users Eligible for the Trade Option Exemption, (http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-08.pdf), and Time-Limited No-Action Relief for Swap Counterparties that are not Swap Dealers or Major Swap Participants, from Certain Swap Data Reporting Requirements of Parts 43, 45 and 46 of the Commission’s Regulations.
2 See letter from Commercial Energy Working Group dated March 1, 2013 requesting no action relief for Part 43, 45 & 46 reporting obligations for end users.
3 See Time-Limited No-Action Relief for Swap Counterparties that are no Swap Dealers or Major Swap Participants, from Certain Swap Data Reporting Requirements of Parts 43, 45 and 46 of the Commission’s Regulations at 6.
4 Financial entities will have to report interest rate and credit default swaps on April 10, 2013, while reporting foreign exchange, equities and other commodity swaps by May 29, 2013. Non-financial entities must report interest rate and credit default swaps by July 1, 2013, while reporting foreign exchange, equities and other commodities by August 19, 2013. Financial and non-financial entities have until September 30, 2013 and October 31, 2013, respectively, to report all outstanding Part 46 data for all asset classes.
5 Volume 156 Congressional Record p. S6192. Reprinting a June 30, 2010 letter from Senator Christopher Dodd and Blanche Lincoln to House Chairmen Collin Peterson and Barney Frank regarding treatment of end users in the Dodd-Frank Wall Street Reform and Consumer Protection Act, H.R. 4173.
7 Executive Order 13563 “Improving Regulation and Regulatory Review” (http://www.gpo.gov/fdsys/pkg/FR-2011-01-21/pdf/2011-1385.pdf), and Executive Order 13579 “Regulation and Independent Regulatory Agencies.” (http://www.gpo.gov/fdsys/pkg/FR-2011-07-14/pdf/2011-17953.pdf )
8 SEE FIA Request Pursuant to Commission Regulation 140.99 for Certain No-Action Relief from Part 46 Requirements dated March 21, 2013
Last Updated: April 9, 2013