December 20, 2011
All across America, families are trekking to the mall looking for the perfect Christmas and Hanukkah presents. The most sought-after holiday gifts are the high-tech gadgets. The gadgets that promise to make life better by making it easier to keep in touch, stay informed, and look really cool. Therefore it is fitting that the Commodity Futures Trading Commission (the “Commission”) is devoting the first night of Hanukkah and last few days before Christmas to gifting two final rules on data and technology. Both rules are designed to enhance the quantity and quality of information available to regulators, market participants, and the public.
These rules have as their goals improved transparency, price discovery, and market integrity. And yet, like all those gadgets, the technology is expensive and with every purchase, one has to ask oneself: Do I really need this? Ultimately, the answer is usually, “Yes. Yes, I do.” As I reviewed these rules today on swap data recordkeeping and reporting and real-time reporting, I came to that same conclusion. These rules, both of which are major rules under the Congressional Review Act, will level the playing field and benefit our markets and the economy as a whole, even if we all find ourselves fumbling around for a bit getting used to the newness of having that much information at our fingertips and figuring out how to best utilize it.
I greatly appreciate the cooperation of the Commission staff and I want to thank both rule teams for their hard work and dedication to completing these complex and highly-technical rules right before the holidays. The transparency of the swaps market is a game changer, and swaps data will be fundamental to the successful transition of the over-the-counter markets to the new regulatory regime, as well as to the Commission’s own transition to being the primary regulator of such markets. I intend to support both rules. I believe both rules in their final iterations have made great strides to accommodate market participant and public input while balancing the needs of the Commission without overreaching. I remain concerned by some of the complexity, which is amplified by the fact that several key definitions have yet to be finalized and that re-proposals are waiting in the wings to fill gaps. However, I believe it is an appropriate time to put these rules out in order to permit the technology build-outs to begin on both sides of the market.
The Value of Trade Data Reporting
Today’s two rulemakings will establish swap data reporting requirements for swap counterparties and regulated entities. The reporting requirements will provide transaction information to market participants in real-time and comprehensive information to the regulators. The goal is twofold. First, important swap transaction-level data will be made available to market participants to improve transparency, price discovery, and market integrity. Second, regulatory reporting will fulfill our regulatory mandates, including systemic risk mitigation, market monitoring, and market abuse prevention.
I recognize that these rules will require market participants to build out complex and costly technology systems. The cost-benefit analyses of both rules identify that each rule will impose costs of more than $100 million on the American economy, thus making each rule a major rule. Mr. Chairman, this brings the current total of major rules promulgated by the Commission to seven, which means that just this handful of Dodd-Frank rules may have a minimum impact on the American economy of at least $700 million.
Even with these extremely substantial costs, the final rules did take many important steps to minimize the burdens and to avoid redundant reporting as compared to the proposals. The two final rules have harmonized their implementation and compliance timelines to avoid forcing market participants to meet disparate deadlines.
For each of the rules, I would like to outline the significant changes that were made to accommodate market participants’ valid concerns with the original proposals. Despite some lingering concerns, these substantive improvements are responsive to those who stand to bear the greatest burdens under these two rules. These improvements earned my support of the two rules.
Swap Data Recordkeeping and Reporting Requirements Rule
The final rule requires reporting of important swap data at a swap’s creation and over the course of its life. All essential data will be provided in a timely fashion so that regulators have an up-to-date picture of a given swap at any time.
The first improvement in the final rule is a streamlined reporting approach where reporting is done by the reporting counterparty that the Commission believes has the easiest, fastest, and cheapest access to data. Importantly, for swaps executed on a swap execution facility (“SEF”) or a designated contract market (“DCM”) and then cleared, reporting counterparties no longer need to report any creation data to swap data repositories (“SDRs”). This will eliminate redundant reporting.
Second, the final rule provides for staggered reporting timelines depending on the asset class and the status of the counterparty. This phasing recognizes the many significant differences in technological maturity between asset classes and counterparties. The rule allows an extended phase-in period for compliance and reporting, which should minimize burdens, particularly on commercial end-users.
Third, the final rule now leaves certain technical decisions to the market. First, in response to comments, the final rule now allows market participants the discretion to determine whether to report information on a lifecycle or snapshot basis for any asset class. Second, it allows counterparties to report data to an SDR in any electronic normalized format acceptable to the SDR. These revisions recognize industry practices and afford much needed flexibility to market participants.
Finally, last week, the Commission held an all-day Technology Advisory Committee (“TAC”) meeting. The TAC Subcommittee on Data Standardization offered several interim recommendations on many of the data elements necessary to make reporting to SDRs successful, such as the creation and issuance of legal entity identifiers, unique swap identifiers, and unique product identifiers, and the standards for retention and storage of data in SDRs. These presentations showed that the objectives and methodologies enumerated in this rule are both practical and implementable. I appreciate all of the work that both the TAC members and subcommittee members put in to advance the debate on data standards in the swap markets.
I was particularly skeptical of the real-time reporting rule when it was proposed in November of 2010. I was concerned that the proposed rule was overly vague, fell short of providing concrete direction to market participants, and did not follow the statutory requirement that any rules we prescribe take into account whether the public disclosure of such swap information will reduce market liquidity—a significant concern of the end-user community. While I remain concerned about the complexity of this rule, as well as its interconnection with an upcoming re-proposal regarding block trade sizes, I believe that this rule is significantly improved from its draft form. Specifically, this rule provides for reasonable interim solutions such as universal time delays and interim caps on the reporting of notional and principal amounts until such time as appropriate minimum block sizes are established and rules finalized. These interim solutions are necessary to protect market participants conducting bilateral swaps in the more illiquid markets through an upcoming re-proposal. These solutions are simply the best that we can offer at this time, and I think market participants will be satisfied and encouraged to continue to participate in the upcoming re-proposal for block trading.
The real-time public reporting final rule addresses many concerns that were expressed by end-users. Specifically, the final rule provides a longer time for end-users that are reporting parties to come into compliance with the real-time reporting requirements. Additionally, the final rule provides for the phasing in of longer time delays with respect to bilateral (off-facility) swaps in which at least one party is an end-user, as such end-user may not have the technology or infrastructure readily available to report such swaps to an SDR for public dissemination in the same timeframes as swap dealers, SEFs or DCMs. The rule’s data fields and time delays have been coordinated with the swap data and recordkeeping rules, thus enabling end-users to mitigate costs in reporting swap data to an SDR. Additionally, the final rules permit reporting parties to utilize a third party to assist in its reporting obligations.
Several end-users that transact in the other commodities asset class1 have indicated that public dissemination of the swap transaction and pricing data relating to certain commodity swaps would disclose the identities, market positions and business transactions of the parties. In response to these comments, the final rule requires public dissemination of the full underlying asset with respect to: (i) any swap executed on or pursuant to the rules of a SEF or DCM; (ii) any swap in which the underlying asset is on a list of 29 contracts (the 28 from our final rulemaking on position limits plus Brent); and (iii) any swap that is economically equivalent to one of the 29 contracts. Swaps in the “other” commodity asset class that do not fall within these three categories would not be subject to the real-time reporting rules at this time and will be addressed in the block trade re-proposal.
Finally, several end-users have indicated that they conduct swaps between affiliates that are not arm’s length transactions and that the public dissemination of such swaps would not enhance price discovery and may confuse the market. The rule’s definition of “publicly reportable swap transaction” requires that only new swaps that are executed at arm’s length and that result in a corresponding change in the market risk position of the other party must be publicly disseminated. This direct response to comments is entirely appropriate and I appreciate that we have moved this far in the rule.
I have great expectations for the upcoming re-proposal of provisions relating to the determination of block trade sizes and provisions relating to public dissemination of certain off-facility swaps. There are certainly many market participants who will benefit from a more focused dialogue. While this is not a second bite at the apple, it is an opportunity to reiterate the strongest arguments from both sides of the rule, and I anticipate a robust debate from all sides.
Mr. Chairman, I would like to wish all my colleagues and all Commission staff a very happy and safe holiday season.
1 Part 43 currently provides that the “other commodity” asset class includes assets that would be not be included in the interest rate, foreign exchange, credit, or equity classes and includes such commodities as energy, metals, and weather.
Last Updated: December 20, 2011