Public Statements & Remarks

Statement of Chairman Heath P. Tarbert in Support of Final Rules on Swap Data Reporting

September 17, 2020

I am pleased to support today’s final swap data reporting rules under Parts 43, 45, and 49 of the CFTC’s regulations, which are foundational to effective oversight of the derivatives markets.  As I noted when these rules were proposed in February, “[d]ata is the lifeblood of our markets.”[1]  Little did I know just how timely that statement would prove to be. 

COVID-19 Crisis and Beyond

In the month following our data rule proposals, historic volatility caused by the coronavirus pandemic rocketed through our derivatives markets, affecting nearly every asset class.[2]  I said at the time that while our margin rules acted as “shock absorbers” to cushion the impact of volatility, the Commission was also considering data rules that would expand our insight into potential systemic risk.  In particular, the data rules “would for the first time require the reporting of margin and collateral data for uncleared swaps . . . significantly strengthen[ing] the CFTC’s ability to monitor for systemic risk” in those markets.[3]  Today we complete those rules, shoring up the data-based reporting systems that can help us identify—and quickly respond to—emerging systemic threats.

But data reporting is not just about mitigating systemic risk.  Vibrant derivatives markets must be open and free, meaning transparency is a critical component of any reporting system.  Price discovery requires robust public reporting that supplies market participants with the information they need to price trades, hedge risk, and supply liquidity.  Today we double down on transparency, ensuring that public reporting of swap transactions is even more accurate and timely.  In particular, our final rules adjust certain aspects of the Part 43 proposal’s block-trade[4] reporting rules to improve transparency in our markets.  These changes have been carefully considered to enhance clarity, one of the CFTC’s core values.[5]

Promoting clarity in our markets also demands that we, as an agency, have clear goals in mind.  Today’s final swap data reporting rules reflect a hard look at the data we need and the data we collect, building on insights gleaned from our own analysis as well as feedback from market participants.  The key point is that more data does not necessarily mean better information.  Instead, the core of an effective data reporting system is focus.

As Aesop reminds us, “Beware lest you lose the substance by grasping at the shadow.”[6]  Today’s final swap data reporting rules place substance first, carefully tailoring our requirements to reach the data that really matters, while removing unnecessary burdens on our market participants.  As Bill Gates once remarked, “My success, part of it certainly, is that I have focused in on a few things.”[7]  So too are the final swap data reporting rules limited in number.  The Part 45 Technical Specification, for example, streamlines hundreds of different data fields currently required by swap data repositories into 128 that truly advance the CFTC’s regulatory goals.  This focus will simplify the data reporting process without undermining its effectiveness, thus fulfilling the CFTC’s strategic goal of enhancing the regulatory experience for market participants at home and abroad.[8]

That last point is worth highlighting: our final swap data reporting rules account for market participants both within and outside the United States.  A diversity of market participants, some of whom reside beyond our borders and are accountable to foreign regulatory regimes, contribute to vibrant derivatives markets.  But before today, inconsistent international rules meant some swap dealers were left to navigate what I have called “a byzantine maze of disparate data fields and reporting timetables” for the very same swap.[9]  While perfect alignment may not be possible or even desirable, the final rules significantly harmonize reportable data fields, compliance timetables, and implementation requirements to advance our global markets.  Doing so brings us closer to realizing the CFTC’s vision of being the global standard for sound derivatives regulation.[10]

Overview of the Swap Data Reporting Rules

It is important to understand the specific function of each of the three swap data reporting rules, which together form the CFTC’s reporting system.  First, Part 43 relates to the real-time public reporting of swap pricing and transaction data, which appears on the “public tape.”  Swap dealers and other reporting parties supply Part 43 data to swap data repositories (SDRs), which then make the data public.  Part 43 includes provisions relating to the treatment and public reporting of large notional trades (blocks), as well as the “capping” of swap trades that reach a certain notional amount.

Second, Part 45 relates to the regulatory reporting of swap data to the CFTC by swap dealers and other covered entities.  Part 45 data provides the CFTC with insight into the swaps markets to assist with regulatory oversight.  A Technical Specification available on the CFTC’s website[11] includes data elements that are unique to CFTC reporting, as well as certain “Critical Data Elements,” which reflect longstanding efforts by the CFTC and other regulators to develop global guidance for swap data reporting.[12]

Finally, Part 49 requires data verification to help ensure that the data reported to SDRs and the CFTC in Parts 43 and 45 is accurate.  The final Part 49 rule will provide enhanced and streamlined oversight of SDRs and data reporting generally.  In particular, Part 49 will now require SDRs to have a mechanism by which reporting counterparties can access and verify the data for their open swaps held at the SDR.  A reporting counterparty must compare the SDR data with the counterparty’s own books and records, correcting any data errors with the SDR.

Systemic Risk Mitigation

Today’s final swap data reporting rules are designed to fulfill our agency’s first Strategic Goal: to strengthen the resilience and integrity of our derivatives markets while fostering the vibrancy.[13]  The Part 45 rule requires swap dealers to report uncleared margin data for the first time, enhancing the CFTC’s ability to “to monitor systemic risk accurately and to act quickly if cracks begin to appear in the system.”[14]  As Justice Brandeis famously wrote in advocating for transparency in organizations, “sunlight is the best disinfectant.”[15]  So too it is for financial markets: the better visibility the CFTC has into the uncleared swaps markets, the more effectively it can address what until now has been “a black box of potential systemic risk.”[16]

Doubling Down on Transparency

Justice Brandeis’s words also resonate across other areas of the final swap data reporting rules.  The final swap data reporting rules enhance transparency to the public of pricing and trade data.

  1. Blocks and Caps

A critical aspect of the final Part 43 rule is the issue of block trades and dissemination delays.  When the Part 43 proposal was issued, I noted that “[o]ne of the issues we are looking at closely is whether a 48-hour delay for block trade reporting is appropriate.”[17]  I encouraged market participants to “provide comment letters and feedback concerning the treatment of block delays.”[18]  Market participants responded with extensive feedback, much of which advocated for shorter delays in making block trade data publicly available.  I agree with this view, and support a key change in the final Part 43 rule.  Rather than apply the proposal’s uniform 48-hour dissemination delay on block trade reporting, the final rule returns to bespoke public reporting timeframes that consider liquidity, market depth, and other factors unique to specific categories of swaps.  The result is shorter reporting delays for most block trades.

The final Part 43 rule also changes the threshold for block trade treatment, raising the amount needed from a 50% to 67% notional calculation.  It also increases the threshold for capping large notional trades from 67% to 75%.  These changes will enhance market transparency by applying a stricter standard for blocks and caps, thereby enhancing public access to swap trading data.  At the same time, the rule reflects serious consideration of how these thresholds are calculated, particularly for block trades.  In excluding certain option trades and CDS trades around the roll months from the 67% notional threshold for blocks, the final rule helps ensure that dissemination delays have their desired effect of preventing front-running and similar disruptive activity.

  1. Post-Priced and Prime-Broker Swaps

The swaps market is highly complex, reflecting a nearly endless array of transaction structures.  Part 43 takes these differences into account in setting forth the public reporting requirements for price and transaction data.  For example, post-priced swaps are valued after an event occurs, such as the ringing of the daily closing bell in an equity market.  As it stands today, post-priced swaps often appear on the public tape with no corresponding pricing data—rendering the data largely unusable.  The final Part 43 rule addresses this data quality issue and improves price discovery by requiring post-priced swaps to appear on the public tape after pricing occurs.

The final Part 43 rule also resolves an issue involving the reporting of prime-brokerage swaps.  The current rule requires that offsetting swaps executed with prime brokers—in addition to the initial swap reflecting the actual terms of trade—be reported on the public tape.  This duplicative reporting obfuscates public pricing data by including prime-broker costs and fees that are unrelated to the terms of the swap.  As I explained when the rule was proposed, cluttering the public tape with duplicative or confusing data can impair price discovery.[19]  The final Part 43 rule addresses this issue by requiring that only the initial “trigger” swap be reported, thereby improving public price information.

  1. Verification and Error Correction

Data is only as useful as it is accurate.  The final Part 49 rule establishes an efficient framework for verifying SDR data accuracy and correcting errors, which serves both regulatory oversight and public price discovery purposes.

Improving the Regulatory Experience

Today’s final swap data reporting rules improve the regulatory experience for market participants at home and abroad in several key ways, advancing the CFTC’s third Strategic Goal.[20]  Key examples are set forth below.

  1. Streamlined Data Fields

As I stated at the proposal stage, “[s]implicity should be a central goal of our swap data reporting rules.”[21]  This sentiment still holds true, and a key improvement to our final Part 45 Technical Specification is the streamlining of reportable data fields.  The current system has proven unworkable, leaving swap dealers and other market participants to wander alone in the digital wilderness, with little guidance about the data elements that the CFTC actually needs.  This uncertainty has led to “a proliferation of reportable data fields” required by SDRs that “exceed what market participants can readily provide and what the [CFTC] can realistically use.”[22] 

We resolve this situation today by replacing the sprawling mass of disparate SDR fields—sometimes running into the hundreds or thousands—with 128 that are important to the CFTC’s oversight of the swaps markets.  These fields reflect an honest look at the data we are collecting and the data we can use, ensuring that our market participants are not burdened with swap reporting obligations that do not advance our statutory mandates.

  1. Regulatory Harmonization

The swaps markets are integrated and global; our data rules must follow suit.[23]  To that end, the final Part 45 rule takes a sensible approach to aligning the CFTC’s data reporting fields with the standards set by international efforts.  Swap data reporting is an area where harmonization simply makes sense.  The costs of failing to harmonize are high, as swap dealers and other reporting parties must provide entirely different data sets to multiple regulators for the very same swap.[24]  A better approach is to conform swap data reporting requirements where possible.

Data harmonization is not just good for market participants: it also advances the CFTC’s vision of being the global standard for sound derivatives regulation.[25]  The CFTC has a long history of leading international harmonization efforts in data reporting, including by serving as a co-chair of the Committee on Payments and Infrastructures and the International Organization of Securities Commissioners (CPMI-IOSCO) working group on critical data elements (CDE) in swap reporting.[26]  I am pleased to support a final Part 45 rule that advances these efforts by incorporating CDE fields that serve our regulatory goals.

In addition to certain CDE fields, the final Part 45 rule also adopts other important features of the CPMI-IOSCO Technical Guidance, such as the use of a Unique Transaction Identifier (UTI) system in place of today’s Unique Swap Identifier (USI) system.  This change will bring the CFTC’s swap data reporting system in closer alignment with those of other regulators, leading to better data sharing and lower burdens on market participants.

Last, the costs of altering data reporting systems makes implementation timeframes especially important.  To that effect, the CFTC has worked with ESMA to bring our jurisdictions’ swap data reporting compliance timetables into closer harmony, easing transitions to new reporting systems.

  1. Verification and Error Correction

The final Part 49 rule has changed since the proposal stage to facilitate easier verification of SDR data by swap dealers.  Based on feedback we received, the final rule now requires SDRs to provide a mechanism for swap dealers and other reporting counterparties to access the SDR’s data for their open swaps to verify accuracy and address errors.  This approach replaces a message-based system for error identification and correction, which would have produced significant implementation costs without improving error remediation.  The final rule achieves the goal—data accuracy—with fewer costs and burdens.[27]

  1. Relief for End Users

I have long said that if our derivatives markets are not working for agriculture, then they are not working at all.[28]  While swaps are often the purview of large financial institutions, they also provide critical risk-management functions for end users like farmers, ranchers, and manufacturers.  Our final Part 45 rule removes the requirement that end users report swap valuation data, and it provides them with a longer “T+2” timeframe to report the data that is required.  I am pleased to support these changes to end-user reporting, which will help ensure that our derivatives markets work for all Americans, advancing another CFTC strategic goal.[29]

Conclusion

The derivatives markets run on data.  They will be even more reliant on it in the future, as digitization continues to sweep through society and industry.  I am pleased to support the final rules under Parts 43, 45, and 49, which will help ensure that the CFTC’s swap data reporting systems are effective, efficient, and built to last.


[1] Statement of Chairman Heath P. Tarbert in Support of Proposed Rules on Swap Data Reporting (Feb. 20, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/tabertstatement022020 [hereinafter, Tarbert, Proposal Statement].

[2] See Heath P. Tarbert, Volatility Ain’t What it Used to Be, Wall Street Journal (Mar. 23, 2020), https://www.wsj.com/articles/volatility-aint-what-it-used-to-be-11585004897?mod=searchresults&page=1&pos=1 [hereinafter Tarbert, Volatility].

[3] Id.

[4] The final rule’s definition of “block trade” is provided in regulation 43.2.

[5] See CFTC Core Values, https://www.cftc.gov/About/Mission/index.htm.

[6] Aesop, “The Dog and the Shadow,” The Harvard Classics, https://www.bartleby.com/17/1/3.html.

[7] ABC News, One-on-One with Bills Gates (Feb. 21, 2008), https://abcnews.go.com/WNT/CEOProfiles/story?id=506354&page=1.

[8] See CFTC Strategic Plan 2020-2024, at 4 (discussing Strategic Goal 3), https://www.cftc.gov/media/3871/CFTC2020_2024StrategicPlan/download.

[9] Tarbert, Proposal Statement, supra note 1.

[10] See CFTC Vision Statement, available at https://www.cftc.gov/About/AboutTheCommission#:~:text=CFTC%20Vision%20Statement,standard%20for%20sound%20derivatives%20regulation.

[11] See CFTC, Technical Specification Document, https://www.cftc.gov/media/4891/DMO_Part43_45TechnicalSpecification091720/download.

[12] Since November 2014, the CFTC and regulators in other jurisdictions have collaborated through the Committee on Payments and Market Infrastructures (“CPMI”) and the International Organization of Securities Commissions (“IOSCO”) working group for the harmonization of key over-the-counter (“OTC”) derivatives data elements (“Harmonisation Group”).  The Harmonisation Group developed global guidance for key OTC derivatives data elements, including the Unique Transaction Identifier, the Unique Product Identifier, and critical data elements other than UTI and UPI.

[13] See CFTC Strategic Plan, supra note 7, at 5.

[14] Tarbert, Proposal Statement, supra note 1, note 2.

[15] Hon. Louis D. Brandeis, Other People's Money 62 (National Home Library Foundation ed. 1933).

[16] Tarbert, Proposal Statement, supra note 1.

[17] Tarbert, Proposal Statement, supra note 1, note 14.

[18] Id.

[19] Tarbert, Proposal Statement, supra note 1.

[20] CFTC Strategic Plan, supra note 7, at 7.

[21] Tarbert, Proposal Statement, supra note 1.

[22] Id.

[23] See Tarbert, Proposal Statement, supra note 1.

[24] See id.

[25] See CFTC Vision Statement, https://www.cftc.gov/About/AboutTheCommission#:~:text=CFTC%20Vision%20Statement,standard%20for%20sound%20derivatives%20regulation.

[26] The CFTC also co-chaired the Financial Stability Board’s working group on UTI and UPI governance.

[27] Limiting error correction to open swaps—versus all swaps that a reporting counterparty may have entered into at any point in time—is also a sensible approach to addressing risk in the markets.  The final Part 49 rule limits error correction to errors discovered prior to the expiration of the five-year recordkeeping period in regulation 45.2, ensuring that market participants are not tasked with addressing old or closed transactions that pose no active risk.

[28] Opening Statement of Chairman Heath P. Tarbert Before the April 22 Agricultural Advisory Committee Meeting (April 22, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement042220.

[29] CFTC Strategic Plan, supra note 7, at 6.

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