We support the extension of the staff no-action position in Letter No. 22-03, which extends the deadline for compliance with the Commission’s “swap block thresholds” from December 4, 2023 to July 1, 2024.  Swap data repositories (“SDRs”) and market participants have established that such an extension is appropriate because of various operational and technological challenges, and resulting inefficiencies, due in part to other global reporting requirements that are happening around the same time.  In addition, there have been unprecedented market shocks, disruptions, and other dislocations in the past several years that have adversely impacted market conditions and liquidity, and therefore merit further study and consideration of changes to the swap block thresholds and their impact on financial stability and systemic risk.

We are deeply disturbed by the statement in the extension letter that staff “does not currently intend to extend the no-action position provided . . . beyond July 1, 2024.”  We appreciate that the complexity of swap block thresholds creates a strong temptation to say that “this has all been decided, we’re done.”  But the stakes for participants in our swap markets are simply too high for the Commission to (continue to) stick its head in the sand on this subject. 

The Commission has never applied a data-driven analysis to reliable data to determine appropriate swap block thresholds in a considered manner.  Simply put:  Our work on this issue is not done.

At the risk of over-simplifying this complex topic, here is a recap of where we are, how we got here, and how the Commission should move forward with respect to swap block thresholds:

1.    In general, a swap block threshold refers to the size of a swap trade at which parties are permitted to negotiate terms away from a swap execution facility (“SEF”) without being subject to the trade execution requirements for trading on-SEF, and at which there is a specified delay in the public reporting of the swap.  Block trades are an established feature of futures trading, but the Commission’s efforts to develop a similar framework for trading swap blocks involving SEFs have been fraught.  

2.    Setting appropriate swap block thresholds requires the Commission to balance competing public policy objectives.  On the one hand, delays in publicly reporting swap transactions run counter to the goal of the Dodd-Frank Act to bring greater transparency to the swap markets through “real-time” public reporting.[1]  But on the other hand, requiring public dissemination of large, block swap trades too quickly can adversely affect the liquidity that is essential to a successful market (and may also increase costs to end users).  Indeed, Congress specifically directed the Commission, when adopting rules providing for public swaps reporting, to “take into account whether the public disclosure will materially reduce market liquidity.”[2] 

3.    The Commission’s technical methodology for calculating swap block thresholds hinges on a notional amount percentage.  But when the Commission issued its swap block rules in mid-2013,[3] it was just beginning to stand up the swap regulatory regime called for by the Dodd-Frank Act – SEFs were just becoming operational, and swap data reporting was in its infancy.  Yet, the Commission gazed into its crystal ball and adopted an initial 50% notional amount percentage for determining swap block thresholds (meaning the larger 50% of swaps by notional amount would be considered block trades entitled to a reporting delay).  It then gazed deeper into its crystal ball and pronounced that in the “post-initial period,” the notional amount percentage for setting swap block thresholds would increase from 50% to 67%.  

4.    An increase in the notional amount percentage to 67% would mean that fewer swaps would qualify as block trades.  But this was an arbitrary increase, not based on any data analysis of its potential impact on the markets because no such data existed at that time.  In recognition of this fact, the Commission stated that its two-step phase-in of block size thresholds “will allow SDRs to collect at least one year of reliable data for each swap category prior to the application of the higher 67-percent notional amount calculation to determine appropriate minimum block sizes in the post initial period . . .”[4] 

5.    The Commission took no further action with respect to swap block thresholds for seven years.  This likely was due at least in part to the fact that, despite the Commission’s best intentions and the efforts of its staff, the initial swap data reporting rules did not yield data that was sufficiently reliable to determine whether swap block thresholds based on a 67% calculation were justified or, if not, what percentage(s) would be appropriate.  

6.    In 2020, based on its experience and lessons learned, the Commission adopted substantial rule amendments to improve the quality of swap data reporting, covering both the reporting of swap transaction data to SDRs and public reporting requirements.[5]  These improvements to the Commission’s swap data reporting regime offered a perfect opportunity for the Commission to fulfill the commitment that it made back in 2013 by stating that it would analyze one year’s worth of the now-reliable data “prior to the application of the higher 67-percent notional amount calculation to determine appropriate minimum block sizes in the post initial period.”  Inexplicably, though, the Commission eschewed a data-driven analysis of appropriate swap block thresholds, and instead, simply retained the 67% calculation – which, pursuant to the staff’s extension letter, will take effect on July 1, 2024. 

7.    The extension letter cites a solitary, cryptic comment in the 2020 Real-Time Reporting Rule that “more than one year’s worth of reliable SDR data has been collected . . .”[6]  There is substantial reason to doubt that was the case.  The Commission’s amendments to its swap data reporting rules in 2020 had their origins in a “Roadmap to Achieve High Quality Swaps Data” undertaken by staff beginning in mid-2017.  One of the stated objectives of this Roadmap was “to remove uncertainty as to what must be reported and how,” which uncertainty calls into serious question the reliability of the then-existing data.[7]  

8.    But even if a year’s worth of reliable SDR data existed at the time of the 2020 amendments to the swap data reporting rules, the Commission did not analyze that data to determine whether the 67% figure that had been forecast back in 2013 was appropriate.  In fact, the Commissioners that adopted those rules expected, on a bipartisan basis, that the Commission would do that before it allowed the 67% calculation to take effect.  Commissioner Berkovitz stated:

. . . 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.[8] 

Commissioner Quintenz agreed with Commissioner Berkovitz:

[W]hen 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 . . . rule improvements adopted today.  It is my firm expectation that . . . 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. . . . 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.[9] 

Yet, that has never happened.  The Commission has not considered new information “in a transparent, inclusive, and deliberative manner” as Commissioner Berkovitz urged.  Nor has the Commission “re-calibrate[d] the minimum block sizes to ensure they strike the appropriate balance built into our statute between the liquidity needs of the market and transparency” as Commissioner Quintenz hoped. 

Meanwhile, there have been major changes in our markets in the past 10 years since the Commission first adopted the reporting rules.  Significantly, a transformation in reference rates from LIBOR to SOFR has been accompanied by a period of high volatility and low market depth.  During the time of zero interest rates, there was simply less volatility, but over the last year-and-a-half, that has reversed.  We need to ensure that we are not adversely impacting end users, financial stability, or systemic risk by increasing these thresholds based on a decision made a decade ago that has never been subjected to critical data analysis. p

Swap market participants have been reporting transaction data pursuant to the Commission’s revised – and improved – reporting rules since December 5, 2022.  In less than two months, then, there will be a year’s worth of reliable data that can be analyzed to assess whether the 67% calculation is justified – or whether a lower or higher percentage(s) would be more appropriate.  Market participants affected by the Commission’s swap block thresholds stand ready to assist with that analysis, as a subcommittee of the CFTC’s Global Markets Advisory Committee (“GMAC”) has established a workstream that has already made an initial presentation on this subject.[10] 

We would hope that, whatever our views on particular policies, we all can agree that those policies should be informed by careful and comprehensive analysis of reliable data when it is available.  Unfortunately, though, we are doubtful that such an analysis can be completed with respect to swap block thresholds by July 1, 2024, the date that the extension letter sets for compliance with the 67% calculation.[11] 

We believe there should be a further extension until December 4, 2024.  This would provide a full year of swap data under the improved swap data reporting rules as of December 2023, followed by six months to evaluate the data, and then an additional six months to arrange compliance ahead of a go-live date of December 4, 2024.

To return to where we started:  The Commission’s work on the issue of appropriate swap block thresholds is not done yet.  It is our sincere hope that the Commission will undertake the data-driven analysis of this issue that has not been done before, and that staff will not close its mind to a further extension of no-action relief beyond July 1, 2024, to allow the time necessary for that analysis to be expeditiously – but properly – completed, and to allow the GMAC to finish its work and present its findings to the Commission.