Remarks of CFTC Commissioner Brian Quintenz at the DerivCon 2018: SEFCON Transformed, Pivoting from Adoption to Adaptation
February 1, 2018
Thank you for that very kind introduction.
Before I begin, let me quickly say that the views contained in this speech are my own and do not represent the views of the Commission. I’m very pleased to be speaking here with you today at DerivCon 2018.
Let’s take a trip back in time. It’s the early 1980s. Beverly Hills Cop and Ghostbusters are the two top grossing films. Prince and Tina Turner are dominating the airwaves. The torture device also known as the rotary telephone1 is being replaced with a push-button model. Answering machines are all the rage. Chances are you do not have a personal computer at home; only 8% of U.S. households do.2 Those computers use floppy disks and run DOS. And IBM and the World Bank enter into a transaction, which is widely considered to be the first swap.3
Fast forward to the present. As of 2015, over 78% of U.S. households have a desktop or laptop.4 That percentage increases to 94% among those 45 years or younger if you include smartphones.5 Approximately seventy percent of U.S. households have home broadband. The top website is Google, we can track car service arrivals in real time, and approximately 1,400 virtual currencies exist.6
Over the past 30 years, advancements in technology and data have revolutionized how we approach even the most mundane aspects of ordinary life. Entertainment, transportation, payments, politics, have all been digitized. Financial regulation is no different. Over the past ten years, the Commodity Futures Trading Commission (CFTC) has made tremendous strides toward collecting and utilizing swap data to further its regulatory mandates. I’d like to spend some time now to reflect on how we got to where we are today and what we hope to accomplish in the future.
An Opaque Derivatives Markets
Almost ten years ago, in the midst of the financial crisis, the over-the-counter (OTC) derivatives markets contracted significantly as market participants struggled to understand their exposures to one another.7 The more firms doubted the creditworthiness of their counterparties, the less willing they were to trade, and more exacerbated each firm’s own liquidity and credit position became. In the aftermath of the crisis, G-20 members pledged to enact reforms to repair our global financial markets and support our future financial stability and prosperity.8 One such reform was mandatory reporting of OTC derivatives to trade repositories in order to “improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.” 9 I believe increasing transparency was the most important principle of swap market reform by far.
Since that time, the CFTC has played a key leadership role in enacting derivatives market reforms—and the agency’s work regarding swap data reporting is no exception. The CFTC was the first regulator in the world to implement swap data reporting requirements.10 As of December 2012, swap dealers and major swap participants began reporting certain asset classes of swaps to swap data repositories or SDRs.11 Once SDR reporting went into effect, the Commission began to receive millions of transaction records annually. For the first time, the basic terms of each trade—such as the counterparties, price, and notional amount—were reported to the Commission. The CFTC could begin to see an individual firm’s swap transactions with various counterparties and answer the basic questions of who, what, when, and where with respect to the swap markets. This data was also disseminated anonymously to the public in real-time in order to provide post-trade transparency to the markets.
However, frequently the data reported was incomplete or incorrect. For example, trade reports would only identify one counterparty, would leave the notional field blank, or would contain off-market, erroneous prices. With the benefit of experience, the CFTC and market participants have made substantial progress toward improving swap data integrity. For example, in 2014, roughly half of all reports for credit default swaps (CDS) lacked complete price information; approximately 15% of all CDS trades lacked a legal entity identifier, making it difficult to identify the counterparty. By 2018, roughly 95% of all CDS trades had complete counterparty and price information.
Although we have made significant improvements, we still have a long way to go. One of the primary objectives of the G-20 Pittsburgh summit was to ensure that regulators could readily analyze swap data to identify and measure risk exposures in the market, in particular counterparty credit risk. We have not yet reached our goal. In large part, this is because regulators are still working to harmonize global reporting standards and data fields across jurisdictions. Without a certain degree of homogeneity, it is simply impossible for the data to be aggregated globally.
International Harmonization Efforts
In September 2014, the Financial Stability Board (FSB) asked the Committee on Payments and Infrastructures and the International Organization of Securities Commissioners, known as CPMI-IOSCO, to develop global guidance on the harmonization of data elements reported to trade repositories and important for the aggregation of data by authorities.12
Over the last three years, the CFTC, acting as a co-chair of the CPMI-IOSCO harmonization group, has worked with our international counterparts to harmonize data standards for swaps trade reporting. Our hard work is finally yielding concrete results. One year ago, CPMI-IOSCO issued final guidance regarding unique transaction identifiers, or UTIs.13 UTIs ensure an OTC transaction is recorded only once, which will facilitate consistent global aggregation and analysis. This past fall, CPMI-IOSCO also issued final guidance on unique product identifiers, or UPIs.14 UPIs will be assigned to each distinct derivative product, allowing data analysis by product type.
CPMI-IOSCO is now working to publish final detailed technical specification guidance on critical data elements (CDEs) in the first or second quarter of 2018. CDEs capture a swap’s primary economic terms, like counterparties, notional amount, price, and the duration of the swap, all of which are essential to perform meaningful global swap data analysis.
In addition to enumerating these critical fields, the guidance will also provide standardized definitions and reporting formats, so that market participants will be able to report the same field consistently. To the extent these fields are adopted identically across jurisdictions, global aggregation and measurement of risk, including counterparty credit risk, increasingly becomes a reality.
The Path Forward
So what does the path forward look like?
In July 2017, the CFTC’s Division of Market Oversight, or DMO, initiated a comprehensive review of existing reporting regulations, soliciting input from market participants and SDRs about how the CFTC could improve its reporting regime.15 DMO identified two primary objectives for the agency’s data reporting overhaul: (1) receiving accurate, complete, high quality data on swap transactions that enable it to fulfill its oversight role; and (2) streamlining reporting by reducing the number of data messages and fields that must be reported. At the same time, DMO published a Roadmap to Achieve High Quality Swaps Data (Roadmap), which provides market participants with a sense of the anticipated rollout, making it easier for participants to plan ahead for the design, testing, and implementation of any required system changes.16
Improving Data Accuracy, Completeness and Quality
In my opinion, improving data accuracy, completeness, and quality are connected, but individual, concepts, with each goal targeting a basic reporting scheme fundamental: accuracy through a counterparty’s role in data confirmation, completeness through an SDR’s role as data gatekeeper, and quality through reporting deadlines.
First, DMO is identifying the best way for counterparties to confirm the accuracy of their trade reports with the SDR. Currently there is some ambiguity under our reporting rules regarding the respective responsibilities of each counterparty to affirmatively verify the accuracy of their SDR data. In my view, a sensible outcome would be for the counterparty who is best situated to confirm the data. In all likelihood, this would be the reporting counterparty. The reporting counterparty already has a relationship with the SDR and also can verify the accuracy of trade reports against its own internal trade records. If the non-reporting counterparty discovers an error, it can notify the reporting party of the error, who can then correct the error with the SDR.17
Increasing data completeness involves enhancing the SDR’s ability to act as a gatekeeper of the data. Although an SDR cannot confirm individual trade details, it can determine if market participants are reporting all required fields in an appropriate format. In my opinion, SDRs should automatically reject trade reports with missing or invalid fields. The Commission has the opportunity to establish clear standards for what minimum set of fields must be reported in order for a trade report to be considered complete by an SDR. Faulty trade reports impede the Commission’s ability to analyze the data.
Finally, to enhance data quality, the Commission can lengthen reporting deadlines. I support providing market participants additional time to meet their regulatory reporting obligations. A later regulatory reporting deadline would help counterparties report trades correctly the first time, instead of reporting an erroneous trade that requires later correction. One possibility is moving to a T+1 deadline, which is ESMA’s standard. I also believe that reporting to the real-time public tape is an important concept, provided there are appropriate exceptions for block trades and other unique types of transactions. To realize a robust real-time reporting scheme, the Commission should revisit the fields subject to real-time reporting, so that only those fields which are known at execution and critical to price discovery are included.
Streamlining Reporting Obligations
I think the key to DMO’s second objective of streamlining reporting lies primarily in incorporating the final CPMI-IOSCO guidance about critical data elements into CFTC reporting regulations. To do so, the Commission will need to propose revised data fields for both real-time and regulatory reporting. In my view, the goal should be for each required data field to be associated with a specific use that advances one of the Commission’s regulatory mandates. To the maximum extent possible, the data fields we propose should match the CPMI-IOSCO fields so that our ability to aggregate data globally is enhanced. However, in some instances, I recognize that the fields will likely need to differ to accommodate specific Commission needs or rules.
Hand-in-hand with proposing this revised set of data fields, the Commission will also need to issue proposed technical specifications. Deciding upon a final set of data fields and uniform technical specifications may be the most important and the most onerous part of our effort to improve data standards. I look forward to hearing feedback from market participants and SDRs as we work to harmonize and finalize our data fields and specifications.
In closing, swap data standardization, collection, assimilation, and analysis have required enormous work and decisive leadership. Chairman Giancarlo’s Roadmap and DMO’s work at both the agency and the international level is finally turning the corner on visibility into the swaps markets. We have an unprecedented amount of swaps data at our fingertips – the vision of the Pittsburgh G-20 agreement is within reach. Thank you so much for having me. It is an honor to be here.
2 Reuben Fischer-Baum, What ‘Tech World’ Did You Grow Up In, Wash. Post, Nov. 26, 2017, https://www.washingtonpost.com/graphics/2017/entertainment/tech-generations/?utm_term=.32b775af8a1b.
3 Seventy Years of Connecting Capital Markets to Development, The World Bank, http://treasury.worldbank.org/cmd/htm/70-years-in-capital-markets.html.
4 Camille Ryan and Jamie M. Lewis, U.S. Census Bureau, Computer and Internet Use in the United States: 2015 4 (Sept. 2017), https://www.census.gov/content/dam/Census/library/publications/2017/acs/acs-37.pdf.
6 Fischer-Baum, supra note 2. These statistics are as of 2016.
7 Fin. Crisis Inquiry Comm’n, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States 298–300, 329, 363, 386 (2011), http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf. For example, outstanding credit derivatives fell by 48% between December 2007 and June 2010.
8 Leaders’ Statement: The Pittsburgh Summit, G-20 (Sept. 24-25, 2009), https://www.oecd.org/g20/summits/pittsburgh/G20-Pittsburgh-Leaders-Declaration.pdf.
10 OTC Derivatives Market Reforms: Fifth Progress Report on Implementation, Financial Stability Board 22-25 (April 15, 2013), http://www.fsb.org/2013/04/r_130415/. See also Mark Bramante, Depository Trust & Clearing Corporation, Swap Data Reporting Rules, SCI 3rd Annual OTC Derivatives Seminar 15 (Oct. 19, 2012), http://www.structuredcreditinvestor.com/PDFs/DTCC_Bramante.pdf.
11 Press Release, Division Q&A – On Start of Swap Data Reporting, CFTC (Oct. 10, 2012), http://www.cftc.gov/LawRegulation/DoddFrankAct/startreporting_qa_final. Reporting requirements for credit and interest rate swaps for swap dealers and major swap participants began on October 12, 2012. However, the first swap dealers and major swap participants registered with the CFTC on December 31, 2012. Reporting for non-swap dealer and non-major swap participants began on April 10, 2013, although DMO granted no-action relief extending the reporting compliance date for certain counterparties. See 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, No-Action Letter 13-10 (April 9, 2013), http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/13-10.pdf.
12 Feasibility Study on Aggregation of OTC Derivatives Trade Repository Data, Financial Stability Board (Sept. 19, 2014), http://www.financialstabilityboard.org/wp-content/uploads/r_140919.pdf.
13 Unique Transaction Identifier Technical Guidance, CPMI-IOSCO (Feb. 2017), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD557.pdf. Last December, FSB issued a final implementation plan for UTIs, recommending that all jurisdictions implement UTIs no later than the end of 2020. See Governance arrangements for the unique transaction identifier (UTI): Conclusions and implementation plan, Financial Stability Board 16 (Dec. 29, 2017), http://www.fsb.org/wp-content/uploads/P291217.pdf.
15 Division of Market Oversight Announces Review of Swaps Reporting Regulations, Press Release (July 10, 2017), http://www.cftc.gov/PressRoom/PressReleases/pr7585-17. The CFTC received over 20 comment letters from market participants. See General CFTC Comments for DMO Swap Data Reporting Review, https://comments.cftc.gov/PublicComments/CommentList.aspx?id=1824&ctl00_ctl00_cphContentMain_MainContent_gvCommentListChangePage=1_50.
16 Roadmap to Achieve High Quality Swaps Data, DMO (July 10, 2017), http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/dmo_swapdataplan071017.pdf.
17 17 C.F.R. § 45.14(b).
Last Updated: February 7, 2018