I have often referenced the need for a review of policies as per the wishes of the G-20 Leaders’ Statement from the Pittsburgh Summit in 2009, which included an expectation that members would “assess regularly implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.”[1] Today, the Commission finds itself debating a challenging issue with a robust history. In order to properly assess whether we are making the right choices, I prefer to consider where we have come from. Luckily, the history of prior Commissions’ deliberations and transparency of regulatory rule-writing efforts affords us such an opportunity for a look back.

Prior to the Dodd-Frank Act[2] and enactment of the CFTC’s swap data reporting regulations, there was very limited, if any, public transparency and price discovery in swaps markets. Today, under the initial calculation applied for block sizes, Commission staff states that 87% of interest rate swap transactions and 82% of credit derivative swap transactions are reported in real time.

The Commission previously decided[3] that an initial calculation (50-percent threshold notional) was appropriate to determine block sizes, and that it would be followed by implementation of a higher block size threshold (67-percent threshold notional) when one year of reliable data from SDRs was available. That Commission was in the unenviable position of making policy determinations without the benefit of the relevant market structures being operational. The original block calculation and the associated sizes were determined before both the trading venues where swaps transact (Swap Execution Facilities, or SEFs) and the data warehouses that collect swaps market information reported to the Commission (Swap Data Repositories, or SDRs) were fully operational.

In the Dodd-Frank Act, Congress amended the Commodity Exchange Act (CEA) to require the Commission to “take into account whether the public disclosure will materially reduce market liquidity.”[4] Whether the Commission did (or was able to) make such an assessment in 2013, when it finalized the original process and treatment for block transactions, is debatable. I cannot say for certain whether the original calculation was appropriate. It was based on limited available data, such as public data that was not applicable to our jurisdictional swaps markets. It was constructed well before the regulations it impacted, the SEF trading mandate. And the data that it should have relied on, from SDRs, was not available, much less reliable. The Commission based its determination of block size, and the resulting SEF execution methods, on a calculation contrived without the benefit of data from SEFs or SDRs.

Despite many years of experience with SEFs and SDRs since then, the Commission is today choosing to continue down the previously determined path of raising block sizes instead of leveraging data. Commenters, including entities responsible for providing liquidity and entities utilizing swaps to perform risk management, expressed concerns that increasing the block size thresholds would negatively impact the swaps market and raise costs for end users. Yet, we are moving forward to further limit the number of transactions that can receive block treatment under real time reporting, and the resulting allowable methods of execution if a swap is included in the SEF mandate. That is, we are raising the threshold largely because a previous Commission decided to do so many years ago.

Though I may not be happy that this Commission is left to grapple with an arbitrary metric set by a former Commission in 2013, even that Commission recognized the importance of considering data before proceeding. The original block rules spoke of the Commission updating the threshold once it had one year’s worth of reliable data. No Commission has ever updated the calculation to adopt higher block sizes, and one would reasonably expect this is due to a lack of reliable data. Today, the Commission is rectifying data reliability challenges by adopting a robust set of rule amendments to improve the quality of swap data reporting, but chooses not to re-assess the block size thresholds with the improved data that will result from those new rules. Perhaps that data will show that we have gone too low or too high in setting the thresholds. I would prefer not to predetermine the outcome until we can ascertain and evaluate the improved data.

The Commission proposed an updated list of categories and refreshed block sizes in February 2020. In the interim period, changes, some that I hope will yield positive results, have been made to affect the categories, calculations, and, as a result, the actual block sizes. However, the lack of transparency concerns me. I believe in this case, it would benefit the Commission to hear from market participants as to their views on the changes to all of these parameters.

I believe that the driving force behind the substantial rewrite of the swap data reporting rule set we are adopting today is that the Commission is not confident in the quality of SDR data, and that an overhaul is needed to provide the CFTC with complete and accurate information for data-driven policy decision making. I feel strongly that the vast majority of the rule amendments before the Commission today will improve the quality of the data reported to SDRs and available for our analysis. I am encouraged that after the 18-month compliance date, staff will be able to better review reliable data and inform the Commission of their analysis as it pertains to block size. I believe the more prudent course of action would be to finalize the remainder of the rules before us today, but set aside any Commission action on block size, thereby preserving current block sizes until the Commission and the public can consider these issues in light of the improved reporting rules and with the new, more reliable data that will result from those rules.

The Commission should incorporate reliable swaps data and what it has learned since the inception of SEFs to make a more fully informed decision on this very meaningful metric. The numbers established in 2013 were arbitrary, and eight years later a different Commission is now faced with reconciling that, still without the availability of reliable data. I believe it is equally unfair to leave another Commission, 30 months from now, with the same predicament. We should not be finalizing a rule to transition to the higher block size calculation today while dictating that other Commissioners implement our decision or have to deal with the consequences of our decision making that is based on contemporary, unreliable data.

It is unclear what, if any, Commission or staff analysis might transpire between the effective date of the swap data reporting rules (18 months) and the block size threshold compliance date (30 months). I intend to ensure that any input received will be taken seriously, notwithstanding its retrospective nature and the fact that it is well beyond many of our terms of office. I wish for the Commission to soon hold a formal forum to receive input from affected market participants, especially end users in these markets, such as those who manage teacher retirement and college savings plans for millions of Americans. It is that input, and reliable data reported pursuant to the enhanced reporting rules we are adopting today, on which the Commission’s block determinations should be based.

I support today’s final rule permitting derivatives clearing organizations (DCOs) organized outside of the United States (non-U.S. DCOs) to register with the Commission and provide clearing to U.S. customers, yet comply with certain DCO Core Principles through their home country regulatory regime.  This final rule maintains the Commission’s authority to protect U.S. customers and markets, while also recognizing the interests of foreign regulators in supervising DCOs located in their home jurisdictions.  It will foster U.S. market participants’ access to foreign clearing organizations while maintaining key customer protections.

This rule is being adopted in furtherance of the Commission’s work with our international colleagues to, where appropriate, mutually recognize third-country central counterparties.  International comity was a key pillar of the 2009 G20 Pittsburgh Summit and effective cooperation among financial regulators bolsters the safety and utility of our global derivatives markets.  Central clearing is critical to managing risk throughout our financial markets, but can only be fully achieved where international regulators work together toward a common goal.  This rule is consistent with the spirit of the CFTC-EU Common Approach[1] regarding requirements for central counterparties, and builds upon the EU equivalence determination[2] and the CFTC comparability determination,[3] issued in connection with the Common Approach.

For a non-U.S. DCO that would like to clear only swaps for U.S. persons and does not pose “substantial risk to the U.S. financial system,” the final rule would provide two options for CFTC registration.  The non-U.S. DCO may apply for DCO registration through the normal course and be subject to all Commission regulations applicable to DCOs.  In the alternative, if the non-U.S. DCO is in good regulatory standing with its home country, it may apply for registration by relying in large part on its home country regime, provided it can demonstrate that the regime satisfies certain DCO Core Principles.  The non-U.S. DCO will still be required to comply with CFTC regulations that provide critical protections to U.S. customers and markets.  The home country regulator must have a memorandum of understanding with the Commission that includes provisions for information sharing and cooperation, so that the Commission may evaluate initial and continued eligibility for registration.  The goal is to encourage registration with the Commission, which enhances our oversight and maintains certain important safeguards, while providing greater clearing options for U.S. market participants.  

Non-U.S. DCOs subject to registration under this alternative path will still need to clear swaps for U.S. customers through registered futures commission merchants.  Accordingly, they will be required to fully comply with the requirements under Commission Regulation 39.15 covering treatment of funds, swap data reporting requirements in part 45 of the Commission’s regulations, certain ongoing and event-specific reporting requirements, and the segregation requirements of Commodity Exchange Act (CEA) section 4d(f)(2) and related regulations.  In addition, a non-U.S. DCO is required to comply with CEA section 39.51(c)(2), which requires it to provide notice to the Commission upon the occurrence of certain important regulatory events. These events include any change in its home country regime or registration status, an examination report or notice of enforcement action issued by a home country regulator, the default of a clearing member, or any action taken by the non-U.S. DCO against any U.S. clearing member.

Only non-U.S. DCOs that do not pose substantial risk to the U.S. financial system will be eligible for registration with alternative compliance.  A non-U.S. DCO that poses substantial risk to the U.S. financial system will still be required to comply with the CEA and all Commission regulations applicable to DCOs, including all of subparts A and B of Part 39, in the same manner as a domestic DCO. 

The final rule defines “substantial risk” to mean that (i) the non-U.S. DCO holds 20 percent or more of the required initial margin of U.S. clearing members for swaps across all registered and exempt DCOs; and (ii) 20 percent or more of the initial margin requirements for swaps at the non-U.S. DCO is attributable to U.S. clearing members.  Despite being characterized as a risk-based test, this is in fact more in the nature of an activity-based test.  I believe an activity-based test is appropriate as a proxy in this instance, as it represents a transparent, objective, and relatively easy-to-measure benchmark.  The 20/20 test, however, may not always accurately measure when the risk to the U.S. financial system presented by the non-U.S. DCO becomes “substantial.”  Accordingly, the Commission will retain the discretion to evaluate other factors in determining whether a non-U.S. DCO poses substantial risk to the U.S. financial system.

I thank the staff of the Division of Clearing and Risk for their work in finalizing this rule.  I also would like to recognize the staff in the Office of International Affairs, the Chairman’s office, and the New York regional office for their hard and productive work over the past few years with our international counterparts.  These efforts to promote harmonization and mutual recognition have provided the foundation for today’s rulemaking.

Today’s final rule providing for registration with alternative compliance for non-U.S. derivatives clearing organizations (DCOs) is a significant milestone in the CFTC’s policy of deferring to foreign regulatory counterparts that have taken a serious and committed approach, similar to the CFTC’s, to adopting the swaps reforms called for by the 2009 G20 Summit in Pittsburgh and championed by important international bodies like the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board (FSB).  Like the CFTC, several foreign regulatory authorities have issued numerous regulations over the past decade regulating the swaps markets at clearinghouses, exchanges, and dealers.[1]   Specific to CCP oversight, numerous jurisdictions, including the CFTC, have implemented the CPMI-IOSCO Principles for Financial Market Infrastructures (PFMIs).[2]  Throughout my tenure at the Commission, I have stated that deference to our foreign counterparts is a necessary way to reduce compliance burdens for industry and to conserve the Commission’s precious resources.[3]  Previous CFTC Chairman Giancarlo promoted a workable deference policy, as evidenced by the publication, during his chairmanship, of the proposed version of the final rule before the Commission today.[4]  I am pleased to see Chairman Tarbert continue this policy, exemplified not only with this final rule, but also with the final rule published by this Commission in July, which sets forth the cross-border application of many of the Commission’s regulations for swap dealers (SDs).[5]

The alternative registration rule for non-U.S. DCOs will prevent non-U.S. DCOs registered with the CFTC from being subject to unnecessary duplicative regulation by both the CFTC and their home country regulator that has issued comparable rules.  The rule will permit a non-U.S. DCOs that does not pose “substantial risk to the U.S. financial system” to be registered with the CFTC but comply with regulations issued by its home country regulator instead of with CFTC regulations, with the limited exception of certain CFTC customer protection and swap data reporting requirements.  The rule recognizes that non-U.S. regulators have a substantial regulatory interest in supervising the DCOs located in their home jurisdictions and appropriately defers to their oversight when compliance with the home country regulatory regime would constitute compliance with DCO core principles.  I note that this rule is consistent with, and an expansion of, the CFTC’s 2016 Equivalence Agreement with the European Union (E.U.), pursuant to which the CFTC granted substituted compliance to dually-registered DCOs based in the E.U.[6]

While the alternative DCO registration rule would provide for a deference-based approach for certain clearinghouses organized abroad, it would not be available to a non-U.S. clearinghouse posing “substantial risk to the U.S. financial system.”  The final rule, like the proposal which I supported, defines this term according to two simple criteria: (i) the foreign DCO holds 20 percent or more of the required initial margin U.S. clearing members for swaps across all registered and exempt DCOs; and (ii) 20 percent or more of the initial margin requirements for swaps at that foreign DCO is attributable to U.S. clearing members.[7]  I believe this two-prong test correctly assesses the DCO’s focus on U.S. firms and impact on the U.S. marketplace.

In voting to adopt the alternative DCO registration final rule, I recognize that E.U. authorities have recently adopted regulations for clearinghouses located outside of the E.U. that access the E.U. market, which are in the spirit of the 2016 agreement on CCPs between the CFTC and the European Commission.[8]  These regulations, issued by the European Commission in July, will only require a U.S. CCP to be generally subject to E.U. regulation and supervision (as a “tier 2 CCP”) if its E.U. presence exceeds certain clear thresholds.[9]  I am pleased that these regulations have now been agreed to by the European Council and by the European Parliament.  The adoption of these regulations represents a marked shift in E.U. policy from the one that existed at the beginning of my term as CFTC Commissioner.  In March of 2018, I stated that I would neither support the CFTC granting additional equivalence determinations within the E.U., nor would I support any relief requested by E.U. authorities, until the E.U. recommitted to honoring its 2016 agreements with the CFTC on CCP oversight.[10]  That agreement had been in jeopardy since the E.U.’s issuance of a revised European Market Infrastructure Regulation (“EMIR 2.2”) in 2017, which raised the possibility of E.U. authorities directly supervising US clearinghouses and requiring them to comply with EMIR.  I am very pleased to see this shift in E.U. policy, which I already recognized in July when voting to expand the Commission’s exemption registration for E.U.-recognized swap trading platforms for additional platforms in several E.U. member states.[11]

In conclusion, I look forward to the CFTC continuing to work cooperatively with our E.U. counterparts in the crucial area of CCP oversight, in a manner that eliminates unnecessary duplicative burdens at both the regulator and registered entity.

I support today’s final rule permitting derivatives clearing organizations (DCOs) organized outside of the United States (non-U.S. DCOs) that the CFTC determines do not pose substantial risk to the U.S. financial system to register with the Commission and comply with the core principles applicable to DCOs (Core Principles) set forth in the Commodity Exchange Act (CEA) through compliance with their home country regulatory regime.  This registration category establishes a new model for regulatory deference aimed at reducing regulatory burdens and ongoing compliance costs for non-U.S. clearing organizations.

As we move forward in executing this new framework, the Commission’s evaluation of the suitability of any particular non-U.S. DCO and the comparability of its home country’s regulatory regime to the Core Principles will be closely watched and analyzed by regulatory and supervisory bodies as well as market participants around the world.  To the extent the Commission is codifying a definition for “substantial risk to the U.S. financial system” that commingles a bright-line test with autonomous agency discretion, its aptitude for exercising a policy rooted in relationships aimed at leveling the global playing field for all, with favoritism towards none will be routinely tested.  As demand for U.S. customer swap clearing evolves and risk neither contemplated nor captured by the dual 20 percent criteria of the substantial risk threshold emerges, the CFTC’s commitments to transparency, ongoing monitoring and market surveillance, preservation of customer protections, and coordination with home country regulators must not fall by the wayside.

I am encouraged by the Commission’s efforts to take a leading role in injecting greater international coordination and mutual respect and deference into the supervision of DCOs, the majority of which operate on a cross-border basis.  Inasmuch as the CFTC’s registration of non-U.S. DCOs with alternative compliance is an expression of the CFTC’s efforts to engage foreign regulators in establishing reciprocity regarding DCO supervision and regulatory oversight, delivering on comity should not overtake fulfilling the core purposes under the CEA, particularly in regard to the avoidance of systemic risk and protection of market participants.  The decisions we make as a Commission, whether driven by policy, statute, regulatory agenda—or even budget—impact and alter risk profiles and interdependencies within the markets we oversee directly and in which U.S. persons participate.  Our markets facilitate both the creation and management of risks in an interconnected web of systems and operations.  It is critical that in all of our undertakings, we consider how our actions alter the landscape and ensure to the greatest extent possible that we build end-to-end resilience into the overall financial system.

I respectfully concur in the Commission’s amendments to its regulations regarding real-time public reporting, recordkeeping, and swap data repositories.  The three rules being finalized together today are the culmination of a multi-year effort to streamline, simplify, and internationally harmonize the requirements associated with reporting swaps.  Today’s actions represent the end of a long procedural road at the Commission, one that started with the Commission’s 2017 Roadmap to Achieve High Quality Swap Data.[1]

But the road really goes back much further than that, to the time prior to the 2008 financial crisis, when swaps were largely exempt from regulation and traded exclusively over-the-counter.[2]  Lack of transparency in the over-the-counter swaps market contributed to the financial crisis because both regulators and market participants lacked the visibility necessary to identify and assess swaps market exposures, counterparty relationships, and counterparty credit risk.[3]

In the aftermath of the financial crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 (Dodd-Frank Act).[4]  The Dodd-Frank Act largely incorporated the international financial reform initiatives for over-the-counter derivatives laid out at the 2009 G20 Pittsburgh Summit, which sought to improve transparency, mitigate systemic risk, and protect against market abuse.[5]  With respect to data reporting, the policy initiative developed by the G20 focused on establishing a consistent and standardized global data set across jurisdictions in order to support regulatory efforts to timely identify systemic risk.  The critical need and importance of this policy goal given the consequences of the financial crisis cannot be overstated.

Among many critically important statutory changes, which have shed light on the over-the-counter derivatives markets, Title VII of the Dodd-Frank Act amended the Commodity Exchange Act (“CEA” or “Act”) and added a new term to the Act:  “real-time public reporting.”[6]  The Act defines that term to mean reporting “data relating to swap transaction, including price and volume, as soon as technologically practicable after the time at which the swap transaction has been executed.”[7]

As we amend these rules, I think it is important that we keep in mind the Dodd-Frank Act’s emphasis on transparency, and what transpired to necessitate that emphasis.  However, the Act is also clear that its purpose, in regard to transparency and real time public reporting, is to authorize the Commission to make swap transaction and pricing data available to the public “as the Commission determines appropriate to enhance price discovery.”[8]  The Act expressly directs the Commission to specify the criteria for what constitutes a block trade, establish appropriate time delays for disseminating block trade information to the public, and “take into account whether the public disclosure will materially reduce market liquidity.”[9]  So, as we keep Congress’s directive regarding public transparency (and the events that necessitated that directive) in mind as we promulgate rules, we also need to be cognizant of instances where public disclosure of the details of large transactions in real time will materially reduce market liquidity.  This is a complex endeavor, and the answers vary across markets and products.  I believe that these final rules strike an appropriate balance.

Today’s final rules amending the swap data and recordkeeping and reporting requirements also culminate a multi-year undertaking by dedicated Commission staff and our international counterparts working through the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions working group for the harmonization of key over-the-counter derivatives data elements.  The amendments benefit from substantial public consultation as well as internal data and regulatory analyses aimed at determining, among other things, how the Commission can meet its current data needs in support of its duties under the CEA.  These include ensuring the financial integrity of swap transactions, monitoring of substantial and systemic risks, formulating bases for and granting substituted compliance and trade repository access, and entering information sharing agreements with fellow regulators.

I wish to thank the responsible staff in the Division of Market Oversight, as well as in the Offices of International Affairs, Chief Economist, and General Counsel for their efforts and engagement over the last several years as well as their constructive dialogues with my office over the last several months.  Their timely and fulsome responsiveness amid the flurry of activity at the Commission as we continue to work remotely is greatly appreciated.

The final rules should improve data quality by eliminating duplication, removing alternative or adjunct reporting options, utilizing universal data elements and identifiers, and focusing on critical data elements.  To the extent the Commission is moving forward with mandating a specific data standard for reporting swap data to swap data repositories (“SDRs”), and that the standard will be ISO 20022, I appreciate the Commission’s thorough discussion of its rationale in support of that decision.  I also commend Commission staff for its demonstrated expertise in incorporating the mandate into the regulatory text in a manner that provides certainty while acknowledging that the chosen standard remains in development.

The rules provide clear, reasonable and universally acceptable reporting deadlines that not only account for the minutiae of local holidays, but address the practicalities of common market practices such as allocation and compression exercises.

I am especially pleased that the final rules require consistent application of rules across SDRs for the validation of both Part 43 and Part 45 data submitted by reporting counterparties.  I believe the amendments to part 49 set forth a practical approach to ensuring SDRs can meet the statutory requirement to confirm the accuracy of swap data set forth in CEA section 21(c)[10] without incurring unreasonable burdens.

I appreciate that the Commission considered and received comments regarding whether to require reporting counterparties to indicate whether a specific swap: (1) was entered into for dealing purposes (as opposed to hedging, investing, or proprietary trading); and/or (2) needs not be considered in determining whether a person is a swap dealer or need not be counted towards a person’s de minimis threshold for purposes of determining swap dealer status under Commission regulations.[11]  While today’s rules may not be the appropriate means to acquire such information, I continue to believe that that the Commission’s ongoing surveillance for compliance with the swap dealer registration requirements could be enhanced through data collection and analysis.

Thank you again to the staff who worked on these rules.  I support the overall vision articulated in these several rules and am committed to supporting the acquisition and development of information technology and human resources needed for execution of that vision. As data forms the basis for much of what we do here at the Commission, especially in terms of identifying, assessing, and monitoring risk, I look forward to future discussions with staff regarding how the CFTC’s Market Risk Advisory Committee which I sponsor may be of assistance.

The Commodity Exchange Act (CEA) specifically directs the Commission to ensure that real-time public reporting requirements for swap transactions (i) do not identify the participants; (ii) specify the criteria for what constitutes a block trade and the appropriate time delay for reporting such block trades, and (iii) take into account whether public disclosure will materially reduce market liquidity.[1]  The Commission has long recognized the intrinsic tension between the policy goals of enhanced transparency versus market liquidity.  In fact, in 2013, the Commission noted that the optimal point in this interplay between enhanced swap transaction transparency and the potential that, in certain circumstances, this enhanced transparency could reduce market liquidity “defies precision.”[2]  I agree with the Commission that the ideal balance between transparency and liquidity is difficult to ascertain and necessarily requires not only robust data but also the exercise of reasoned judgement, particularly in the swaps marketplace with a finite number of institutional investors trading hundreds of thousands of products, often by appointment.

Unfortunately, I fear the balance struck in this rule misses that mark. The final rule before us today clearly favors transparency over market liquidity, with the sacrifice of the latter being particularly more acute given the nature of the swaps market.  In this final rule, the Commission asserts that the increased transparency resulting from higher block trade thresholds and cap sizes will lead to increased competition, stimulate more trading, and enhance liquidity and pricing. That is wishful thinking, which is no basis upon which to predicate a final rule. As numerous commenters pointed out, this increased transparency comes directly at the expense of market liquidity, competitive pricing for end-users, and the ability of dealers to efficiently hedge their large swap transactions.  While the Commission hopes the 67% block calculation will bring about the ample benefits it cites, I think the exact opposite is the most probable outcome.  I remain unconvinced that the move from the 50% notional amount calculation for block sizes to the 67% notional amount calculation is necessary or appropriate.  Unfortunately, the decision to retain the 67% calculation, which was adopted in 2013 but never implemented, was not seriously reconsidered in this rule.

Instead, in the final rule, the Commission asserts that it “extensively analyzed the costs and benefits of the 50-percent threshold and 67-percent threshold when it adopted the phased-in approach” in 2013.  Respectfully, I believe that statement drastically inflates the Commission’s prior analysis.  I have no doubt the Commission “analyzed” the costs and benefits in 2013 to the best of its ability.  However, the reality is that in 2013, as the Commission acknowledged in its own cost-benefit analysis, “in a number of instances, the Commission lacks the data and information required to precisely estimate costs, owing to the fact that these markets do not yet exist or are not yet fully developed.”[3]  In 2013, the Commission was just standing up its SEF trading regime, had not yet implemented its trade execution mandate, and had adopted interim time delays for all swaps – meaning that, in 2013 when it first adopted this proposal, no swap transaction data was publicly disseminated in real time.  Seven years later, the Commission has a robust, competitive SEF trading framework and a successful real-time reporting regime that results in 87% of IRS trades and 82% of CDS trades being reported in real time.  In light of the sea change that has occurred since 2013, I believe the Commission should have undertaken a comprehensive review of whether the transition to a 67% block trade threshold was appropriate.

In my opinion, the fact that currently 87% of IRS and 82% of CDS trades are reported in real time is evidence that the transparency policy goals underlying the real-time reporting requirements have already been achieved.  In 2013, the Commission, quoting directly from the Congressional Record, noted that when it considered the benefits and effects of enhanced market transparency, the “guiding principle in setting appropriate block trade levels [is that] the vast majority of swap transactions should be exposed to the public market through exchange trading.”[4]  The current block sizes have resulted in exactly that - the vast majority of trades being reported in real time.  The final rule, acknowledging these impressively high percentages, nevertheless concludes that because less than half of total IRS and CDS notional amounts is reported in real time, additional trades should be forced into real-time reporting.  I reach the exact opposite conclusion.  By my logic, the 13% of IRS and 18% of CDS trades that currently receive a time delay represent roughly half of notional for those asset classes.  In other words, these trades are huge.  In my view, these trades are exactly the type of outsized transactions that Congress appropriately decided should receive a delay from real-time reporting.

Despite my reservations, I am voting for the real-time reporting rule before the Commission today for several reasons.  First, I worked hard to ensure that this final rule contains many significant improvements from the initial draft we were first presented, as well as the original proposal which I supported.  For example, in order to make sure the CDS swap categories are representative, the Commission established additional categories for CDS with optionality.  In addition, the Commission is also providing guidance that certain risk-reduction exercises, which are not arm’s length transactions, are not publicly reportable swap transactions, and therefore should be excluded from the block size calculations.

Second, while most of the changes to the part 43 rules will have a compliance period of 18 months, compliance with the new block and cap sizes will not be not be required until one year later, providing market participants with a 30-month compliance period and the Commission with an extra 12 months to revisit this issue with actual data analysis, as good government and well-reasoned public policy demands. This means that when any final block and cap sizes go into effect for the amended swap categories, it will be with the benefit of cleaner, more precise data resulting from our part 43 final rule improvements adopted today.  It is my firm expectation that DMO staff will review the revised block trade sizes, in light of the new data, at that time to ensure they are appropriately calibrated for each swap category.  In addition, as required by the rule, DMO will publish the revised block trade and cap sizes the month before they go effective.  I am hopeful that with the benefit of time, cleaner data and public comment, the Commission can, if necessary, re-calibrate the minimum block sizes to ensure they strike the appropriate balance built into our statute between the liquidity needs of the market and transparency.  To the extent market participants also have concerns about maintaining the current time delays for block trades given the move to the 67% calculation, I encourage them to reach out to DMO and my fellow Commissioners during the intervening 30-month window.  That time frame is more than enough to further refine the reporting delays, as necessary, for the new swap categories based on sound data.

Introduction

I support today’s final rules amending the swap data reporting requirements in parts 43, 45, 46, and 49 of the Commission’s rules (the “Reporting Rules”).  The amended rules provide major improvements to the Commission’s swap data reporting requirements.  They will increase the transparency of the swap markets, enhance the usability of the data, streamline the data collection process, and better align the Commission’s reporting requirements with international standards.

The Commission must have accurate, timely, and standardized data to fulfill its customer protection, market integrity, and risk monitoring mandates in the Commodity Exchange Act (CEA).[1] The 2008 financial crisis highlighted the systemic importance of global swap markets, and drew attention to the opacity of a market valued notionally in the trillions of dollars.  Regulators such as the CFTC were unable to quickly ascertain the exposures of even the largest financial institutions in the United States.  The absence of real-time public swap reporting contributed to uncertainty as to market liquidity and pricing.  One of the primary goals of the Dodd-Frank Act is to improve swap market transparency through both real-time public reporting of swap transactions and “regulatory reporting” of complete swap data to registered swap data repositories (SDRs).[2]

As enacted by the Dodd-Frank Act, CEA section 2(a)(13)(G) directs the CFTC to establish real-time and comprehensive swap data reporting requirements, on a swap-by-swap basis.  CEA section 21 establishes SDRs as the statutory entities responsible for receiving, storing, and facilitating regulators’ access to swap data.  The Commission began implementing these statutory directives in 2011 and 2012 in several final rules that addressed regulatory and real-time public reporting of swaps; established SDRs to receive data and make it available to regulators and the public; and defined certain swap dealer (SD) and major swap participant (MSP) reporting obligations.[3]

The Commission was the first major regulator to adopt data repository and swap data reporting rules.  Today’s final rules are informed by the Commission’s and the market’s experience with these initial rules.  Today’s revisions also reflect recent international work to harmonize and standardize data elements.

PART 43 Amendments (Real-time Public Reporting)

Benefits of Real Time Public Reporting

Price transparency fosters price competition and reduces the cost of hedging.  In directing the Commission to adopt real-time public reporting regulations, the Congress stated ‘‘[t]he purpose of this section is to authorize the Commission to make swap transaction and pricing data available to the public in such form and at such times as the Commission determines appropriate to enhance price discovery.’’[4] For real-time data to be useful for price discovery, SDRs must be able to report standardized, valid, and timely data. The reported data should also reflect the large majority of swaps executed within a particular swap category.  The final Reporting Rules for part 43 address a number of infirmities in the current rules affecting the aggregation, validation, and timeliness of the data.  They also provide pragmatic solutions to several specific reporting issues, such as the treatment of prime broker trades and post-priced swaps. 

Block Trade Reporting

The Commission’s proposed rule for block trades included two significant amendments to part 43: (1) refined swap categories for calculating blocks; and (2) a single 48-hour time-delay for reporting all blocks.  In addition, the proposed rule would give effect to increased block trade size thresholds from 50% to 67% of a trimmed (excluding outliers) trade data set as provided for in the original part 43.  The increases in the block sizing thresholds and the refinement of swap categories were geared toward better meeting the statutory directives to the Commission to enhance price discovery through real-time reporting while also providing appropriate time delays for the reporting of swaps with very large notional amounts, i.e., block trades.

Although I supported the issuance of the proposed rule, I outlined a number of concerns with the proposed blanket 48-hour delay.  As described in the preamble to the part 43 final rule, a number of commenters supported the longer delay as necessary to facilitate the laying off of risk resulting from entering into swaps in illiquid markets or with large notional amounts.  Other commenters raised concerns that such a broad, extended delay was unwarranted and could impede, rather than foster, price discovery.  The delay also would provide counterparties to large swaps with an information advantage during the 48-hour delay. 

The CEA directs the Commission to provide for both real-time reporting and appropriate block sizes.  In developing the final rule the Commission has sought to achieve these objectives.    

As described in the preamble, upon analysis of market data and consideration of the public comments, the Commission has concluded that the categorization of swap transactions and associated block sizes and time delay periods set forth in the final rule strikes an appropriate balance to achieve the statutory objectives of enhancing price discovery, not disclosing “the business transactions and market positions of any person,” preserving market liquidity, and providing appropriate time delays for block transactions.  The final part 43 includes a mechanism for regularly reviewing swap transaction data to refine the block trade sizing and reporting delays as appropriate to maintain that balance.

Consideration of Additional Information Going Forward

I have consistently supported the use of the best available data to inform Commission rulemakings, and the periodic evaluation and updating of those rules, as new data becomes available.  The preamble to the final rules for part 43 describes how available data, analytical studies, and public comments informed the Commission’s rulemaking.  Following press reports about the contents of the final rule, the Commission recently has received comments from a number of market participants raising issues with the reported provisions in the final rule.  These commenters have expressed concern that the reported reversion of the time delays for block trades to the provisions in the current regulations, together with the 67% threshold for block trades, will impair market liquidity, increase costs to market participants, and not achieve the Commission’s objectives of increasing price transparency and competitive trading of swaps.  Many of these commenters have asked the Commission to delay the issuance of the final rule or to re-propose the part 43 amendments for additional public comments.

I do not believe it would be appropriate for the Commission to withhold the issuance of the final rule based on these latest comments and at this late stage in the process.  The Commission has expended significant time and resources in analyzing data and responding to the public comments received during the public comment period.  As explained in the preamble, the Commission is already years behind its original schedule for revising the block thresholds.  I therefore do not support further delay in moving forward on these rules.    

Nonetheless, I also support evaluation and refinement of the block reporting rules, if appropriate, based upon market data and analysis.  The 30-month implementation schedule for the revised block sizes provides market participants with sufficient time to review the final rule and analyze any new data. Market participants can then provide their views to the Commission on whether further, specific adjustments to the block sizes and/or reporting delay periods may be appropriate for certain instrument classes.  This implementation period is also sufficient for the Commission to consider those comments and make any adjustments as may be warranted.  The Commission should consider any such new information in a transparent, inclusive, and deliberative manner.  Amended part 43 also provides a process for the Commission to regularly review new data as it becomes available and amend the block size thresholds and caps as appropriate.

Cross Border Regulatory Arbitrage Risk 

The International Swaps and Derivatives Association, Inc. (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) commented that higher block size thresholds may put swap execution facilities (SEFs) organized in the United States at a competitive disadvantage as compared to European trading platforms that provide different trading protocols and allow longer delays in swap trade reporting.  SIFMA and ISDA commented that the higher block size thresholds might incentivize swap dealers to move at least a portion of their swap trading from United States SEFs to European trading platforms.  They also noted that this regulatory arbitrage activity could apply to swaps that are subject to mandatory exchange trading.  Importantly, European platforms allow a non-competitive single-quote trading mechanism for these swaps while U.S. SEFs are required to maintain more competitive request-for-quotes mechanisms from at least three parties.  The three-quote requirement serves to fulfill important purposes delineated in the CEA to facilitate price discovery and promote fair competition. 

The migration of swap trading from SEFs to non-U.S. trading platforms to avoid U.S. trade execution and/or swap reporting requirements would diminish the liquidity in and transparency of U.S. markets, to the detriment of many U.S. swap market participants.  Additionally, as the ISDA/SIFMA comment letter notes, it would provide an unfair competitive advantage to non-U.S. trading platforms over SEFs registered with the CFTC, who are required to abide by CFTC regulations.  Such migration would fragment the global swaps market and undermine U.S. swap markets.[5]

I have supported the Commission’s substituted compliance determinations for foreign swap trading platforms in non-U.S. markets where the foreign laws and regulations provide for comparable and comprehensive regulation.  Substituted compliance recognizes the interests of non-U.S. jurisdictions in regulating non-U.S. markets and allows U.S. firms to compete in those non-U.S. markets.  However, substituted compliance is not intended to encourage—or permit—regulatory arbitrage or circumvention of U.S. swap market regulations.  If swap dealers were to move trading activity away from U.S. SEFs to a foreign trading platform for regulatory arbitrage purposes, such as, for example, to avoid the CFTC’s transparency and trade execution requirements, it would undermine the goals of U.S. swap market regulation, and constitute the type of fragmentation of the swaps markets that our cross-border regime was meant to mitigate. It also would undermine findings by the Commission that the non-U.S. platform is subject to regulation that is as comparable and comprehensive as U.S. regulation, or that the non-U.S. regime achieves a comparable outcome. 

The Commission should be vigilant to protect U.S. markets and market participants.  The Commission should monitor swap data to identify whether any such migration from U.S. markets to overseas markets is occurring and respond, if necessary, to protect the U.S. swap markets.

PART 45 (Swap Data Reporting), PART 46 (Pre-enactment and Transition Swaps), and PART 49 (Swap Data Repositories) Amendments

I also support today’s final rules amending the swap data reporting, verification, and SDR registration requirements in parts 45, 46, and 49 of the Commission’s rules.  These regulatory reporting rules will help ensure that reporting counterparties, including SDs, MSPs, designated contract markets (DCMs), SEFs, derivatives clearing organizations (DCOs), and others report accurate and timely swap data to SDRs.  Swap data will also be subject to a periodic verification program requiring the cooperation of both SDRs and reporting counterparties.  Collectively, the final rules create a comprehensive framework of swap data standards, reporting deadlines, and data validation and verification procedures for all reporting counterparties.  

The final rules simplify the swap data reports required in part 45, and organize them into two report types: (1) “swap creation data” for new swaps; and (2) “swap continuation data” for changes to existing swaps.[6] The final rules also extend the deadline for SDs, MSPs, SEFs, DCMs, and DCOs to submit these data sets to an SDR, from “as soon as technologically practicable” to the end of the next business day following the execution date (T+1).  Off-facility swaps where the reporting counterparty is not an SD, MSP, or DCO must be reported no later than T+2 following the execution date. 

The amended reporting deadlines will result in a moderate time window where swap data may not be available to the Commission or other regulators with access to an SDR.  However, it is likely that they will also improve the accuracy and reliability of data.  Reporting parties will have more time to ensure that their data reports are complete and accurate before being transmitted to an SDR.[7]

The final rules in part 49 will also promote data accuracy through validation procedures to help identify errors when data is first sent to an SDR, and periodic reconciliation exercises to identify any discrepancies between an SDR’s records and those of the reporting party that submitted the swaps.  The final rules provide for less frequent reconciliation than the proposed rules, and depart from the proposal’s approach to reconciliation in other ways that may merit future scrutiny to ensure that reconciliation is working as intended.  Nonetheless, the validation and periodic reconciliation required by the final rule is an important step in ensuring that the Commission has access to complete and accurate swap data to monitor risk and fulfill its regulatory mandate.      

The final rules also better harmonize with international technical standards, the development of which included significant Commission participation and leadership.  These harmonization efforts will reduce complexity for reporting parties without significantly reducing the specific data elements needed by the Commission for its purposes.  For example, the final rules adopt the Unique Transaction Identifier and related rules, consistent with CPMI-IOSCO technical standards, in lieu of the Commission’s previous Unique Swap Identifier.  They also adopt over 120 distinct data elements and definitions that specify information to be reported to SDRs.  Clear and well-defined data standards are critical for the efficient analysis of swap data across many hundreds of reporting parties and multiple SDRs.  Although data elements may not be the most riveting aspect of Commission policy making, I support the Commission’s determination to focus on these important, technical elements as a necessary component of any effective swap data regime.     

Conclusion

Today’s Reporting Rules are built upon nearly eight years of experience with the current reporting rules and benefitted from extensive international coordination.  The amendments make important strides toward fulfilling Congress’s mandate to bring transparency and effective oversight to the swap markets.   I commend CFTC staff, particularly in Division of Market Oversight and the Office of Data and Technology, who have worked on the Reporting Rules over many years.  Swaps are highly variable and can be difficult to represent in standardized data formats.  Establishing accurate, timely, and complete swap reporting requirements is a difficult, but important function for the Commission and regulators around the globe.  This proposal offers a number of pragmatic solutions to known issues with the current swap data rules.  For these reasons, I am voting for the final Reporting Rules. 

I am pleased to support today’s final rule that will improve the accuracy of data reported to, and maintained by, CFTC-registered swap data repositories (SDRs).  Data collected by SDRs provides a crucial source of information to the CFTC as it discharges its statutory responsibilities to supervise regulated entities, monitor the derivatives markets, and enforce the Commodity Exchange Act.  Today’s rule makes sensible adjustments to how reporting counterparties submit swap data to SDRs and how SDRs fulfill their responsibilities as Commission registrants.  These adjustments are based on the almost decade-long experience of the CFTC staff in supervising SDRs and reviewing swap data, as well as the public’s informed comments to the proposal.

The focus of today’s final rule concerns new requirements for the periodic verification of data submitted to SDRs and correction of errors.[1]  While on the surface, this may sound like little more than routine, back-office clean-up, it is actually a well-thought program for significantly improving the reliability of data collected by SDRs.  The requirements issued today differ from those that were proposed, in terms of the manner and frequency by which reporting counterparties, generally speaking Commission-registered swap dealers (SDs) or derivatives clearing organizations (DCOs), will verify swap data they have previously submitted to an SDR.  Taking market participants’ comments into account, the final requirements are more efficient than those proposed.  They are partially based on an existing framework established by an SDR.  In addition, verification will be required by SDs and DCOs on a monthly, rather than weekly, basis.[2]

Other aspects of the final rule that I believe will improve the ability of Commission staff to use swap data collected by SDRs concern how SDRs submit data to the Commission.[3]  Like the new rules for verification and correction of errors, I believe these provisions are appropriately calibrated so as not unduly to burden the SDRs while enabling the Commission to obtain swap data more reliably and efficiently.

Finally, I would like to note that the amended SDR rules adopted today are largely consistent with the SEC’s rules for security-based SDRs.  I expect that this consistency will reduce costs and ease compliance burdens for entities registering as data repositories with both the agencies, as well as for reporting counterparties submitting data to both SDRs and security-based SDRs.

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.

2.    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.

3.    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.

2.    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.

3. 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]

4. 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.

I am very pleased to be here today finalizing improvements to the Commission’s swap data reporting rules[1], which I will refer to collectively as the “Final Rules.”  I have always felt that the entire suite of swap data reporting rules must be considered holistically to ensure that the CFTC delivers the best regulations possible.  I am happy to see that the Commission will today act on all three of these Final Rules concurrently. 

This set of regulations is a massive undertaking as it encompasses not only three different rule sets that are intrinsically linked, but also must intertwine the activities of different entities that compose the swap data reporting ecosystem.  The parties and interests involved include: (1) reporting parties of all types, such as the Swap Dealers (SDs), Swap Execution Facilities, Derivatives Clearing Organizations (DCOs), and End Users that report the data; (2) the Swap Data Repositories (SDRs) that collect the data; (3) bodies that foster data quality through standard-setting efforts; (4) domestic and international regulators with mandates to require swap data reporting; and (5) recommendations of international regulatory groups, such as the Committee on Payments and Market Infrastructures, the International Organization of Securities Commissions (CPMI-IOSCO) and the Financial Stability Board (FSB).

I would like to thank the staff of the Division of Market Oversight (DMO) for their efforts over the past several years and I applaud their perseverance and commitment to adopting these rules.  In addition, I appreciate the many folks across the Office of Data and Technology, Office of the Chief Economist, and Office of the General Counsel who contributed greatly to the Final Rules before us today.  I am grateful for their attention to incorporating suggestions from my Office. 

The most obvious challenge for the over-the-counter (OTC) swaps regulation during the financial crisis was the lack of information.  I have long believed that lack of information, especially concerning swaps markets, was among the most fundamental issues to be addressed post-crisis.  In 2012, the Commission tackled the difficult task of being the first mover to implement swap data reporting regulations, which I will refer to as the “Original Rules.”  Unfortunately, the resulting data was of limited utility due to a variety of challenges and shortcomings.  The G-20 Leaders’ Statement from the Pittsburgh Summit in 2009 included an expectation that members would “assess regularly implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.”[2]  The CFTC has done such a review, and thus today is able to improve scores of reporting regulations. 

The Final Rules will clarify the obligations and processes for reporting swaps data and result in a substantial improvement in the quality of swaps data presented to both the public and the CFTC.  With the benefit of time and experience, we now are able to better harmonize with other regulators around the world, reasonably refine reporting obligations to a common set of reportable elements, improve the accuracy of regulatory reporting, and reduce the burden placed on market participants.  I consider swap data reporting to be foundational to effectuating reforms in the OTC swaps market, and I expect the Commission will leverage the robust swaps data set resulting from the Final Rules to make informed and data-driven policy determinations going forward.  

Positive Improvements Finalized Today

I expect much of the public attention devoted to the Final Rules will focus on the unfortunate process by which the Commission is advancing the block trade thresholds.  While I acknowledge the process surrounding blocks was less than transparent and poorly communicated, that criticism resides with the Commission, and not the staff who have worked diligently to improve the broader application of swap data.  Neglecting to distinguish the many other aspects of the Final Rules that deserve a positive reception would be an unfortunate oversight in recognizing the tremendous improvements the rule-writing teams have made elsewhere to our reporting regime.  Today’s actions will establish what was previously messaged in the Roadmap to Achieve High Quality Swaps Data[3] and should be touted as a tremendous accomplishment. 

I feel it is important to highlight the multitude of positive improvements included within the breadth of changes we are making to the swap data reporting rules. The Final Rules:

1. Streamline swap data reporting into a single message type, instead of requiring two separate types of data to be submitted (referred to as Primary Economic Terms and Confirmation Data in the Original Rules);
2. Refine the swap data elements that must be reported based on identified use-cases, rather than the unlimited scope of the Original Rules that required a much broader amount of information;
3. Allow for more accurate and complete reporting of swaps data within a T+1 timeframe for SD and DCO reporting counterparties and T+2 for End Users, in contrast to the near real-time-after-execution reporting that generates inaccurate information flows and necessitates subsequent corrections under the current regime;
4. Provide a clear and standardized technical specification including definitions, formats, allowable values, and validations, whereas the previous iteration did not provide a technical format but only a list of fields and comments;
5. Harmonize with other domestic and international regulators, such as the Securities and Exchange Commission (SEC) and the European Securities and Markets Authority (ESMA), while applying the CPMI-IOSCO Technical Guidance[4] as appropriate, versus continuing the misalignment that resulted from being the first mover to adopt swap data reporting many years ago with other regulators applying vastly different approaches later;
6. Remove the obligation to report the “mirror swap” component of the prime brokerage process to minimize the dissemination of non-price forming events, appropriately postpone the reporting of post-priced swaps, and create a mechanism to highlight these unique transaction types on the public tape, whereas the Original Rules did not address these events;
7. Require consistent validations of all required data elements and format, whereas the Original Rules did not specify validations with the result that SDRs apply different approaches;
8. Require the verification of data accuracy for all open swaps at SDRs to improve data quality, instead of the current system where swaps data is not being reviewed and checked on a regular basis;
9. Remove the unnecessary quarterly reporting of swap valuations by End Users contained in the Original Rules; and
10. Do not require DCOs to report margin and collateral information for cleared swaps to SDRs and instead appropriately utilize other data sets already collected by the Commission. 

In short:  Today’s Final Rules create a mechanism for achieving higher quality swaps data through standardization and harmonization.  At the end of the day, the Final Rules are about so much more than just blocks—they are a tremendous effort in improving swap data reporting. 

Next Steps 

As I have previously mentioned, finalizing these rules is not the last step in enhancing the swap data reporting process as three other key components remain that require our attention.  First, the Commission, reporting counterparties, and SDRs will need to work together to prepare for an efficient implementation.  Our experience adopting prior swap data reporting rules and working with affected parties through the years has taught that significant effort, time, and coordination is required to appropriately make such changes.  The 18-month compliance schedule should allow for this work to be properly effectuated in order to successfully transition to these new regulations.   

Second, attention should turn to the analysis and eventual outcomes-based granting of substituted compliance determinations with respect to swap data reporting regimes in other jurisdictions.  While efforts have been made to harmonize where possible, each jurisdiction’s reporting rules will undoubtedly retain some unique characteristics.  Substituted compliance is essential considering the global nature of the swaps market and that 56% of CFTC registered swap dealers are non-US persons.   

Third, the sharing of harmonized, high-quality swaps data with other domestic and international regulators should progress in earnest where appropriate.  After all, such regulatory coordination to facilitate oversight of global swaps markets is one of the driving forces behind the swap market reforms and data reporting efforts agreed to at the G-20 Pittsburgh Summit. 

*  *  *  *  *

I again want to express my thanks to the numerous staff across the agency for their hard work on the complex and technical challenge of improving swap data reporting through today’s Final Rules.