Statement of Commissioner Dawn D. Stump Regarding Proposed Rules: Swap Data Reporting

February 20, 2020

I am very pleased to be here today addressing updates to the Commission’s swap data reporting rules (which I will refer to collectively as the “proposal”). I would like to thank the staff of the Division of Market Oversight (DMO) for their efforts over the past several years to advance what I consider foundational to effectuating reforms in the over-the-counter (OTC) swaps market.  I applaud their commitment to adapting these rules, and I am grateful for their attention to incorporating suggestions from my Office. I also would like to thank the Office of the Chief Economist and the Office of General Counsel for their many contributions to ready this rule for consideration today.

At the onset of the financial crisis, the most obvious regulatory predicament for OTC swaps was the lack of information.  The Pittsburgh accords were predicated upon the global regulatory community needing to procure data to inform decision makers about these opaque markets.  I have long believed that lacking information, especially concerning swaps markets, was among the most fundamental issues to be addressed post-crisis.

In 2012, the Commission was the first mover in establishing reporting requirements for swaps markets, and other regulatory bodies followed with their own reporting regimes.  Despite the substantial efforts and costs to implement these rules, the different data elements, formatting, and technical specifications utilized by individual jurisdictions make it extremely difficult to aggregate data across global markets – and thus limit the data’s utility.  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.”[1]  Today, the CFTC is heeding that direction.

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 end-users.

I would also note that last year, the CFTC published a rule proposal outlining ideas on how to confirm the accuracy of swap data reported to swap data repositories (SDRs).[2]  I think it is prudent to also re-open the comment period for that proposed rulemaking today.  I have always felt that the entire suite of swap data reporting rules must be considered together for the public to be able to comment in an informed manner and help ensure that the CFTC delivers the best regulations possible.[3]

Positive Improvements Proposed Today

DMO staff previously shared what it hoped to accomplish with the Roadmap to Achieve High Quality Swaps Data,[4] and today your work and the Commission’s vote will move us one step closer to achieving the goals laid out a decade ago in Pittsburgh.  The takeaways from today’s Open Meeting might focus on a limited number of policy choices, but I feel it is important to highlight the multitude of positive improvements included within the breadth of changes to these regulations.

For example, previous iterations of swap data reporting rules lacked specificity and did not include clear definitions, allowable values, or form and manner for all reportable data elements.  By more clearly defining what is expected, the proposal also appropriately removes what has become known as the ‘catch-all bucket’ to report “any other term(s) of the swap matched or affirmed by the counterparties in verifying the swap,” including instructions to “use as many fields as required to report each such term.”[5]  This ambiguity created compliance risk for both SDRs and reporting counterparties and led to the proliferation of swap data reporting elements included in the data.  As a result, in some circumstances the menu of options on what and how to report swap data expanded from several hundred to over 1,000 swap data elements.  Today, we present a more tailored and finite list of required swap data elements that have been identified by staff as possessing tangible and repeatable use cases.

The proposal also improves the efficacy of the public swaps reporting by focusing on price forming events and minimizing the dissemination of extraneous information that does not foster price discovery.  The proposal removes the requirement to report the “mirror swap” component of the prime brokerage process that has limited price discovery value.  It also clarifies how and when to report post-priced swaps and risk compression exercises, and highlights these unique transaction types on the public tape.

The proposal reasonably extends the deadline for reporting regulatory data for swaps to T+1 for large, sophisticated reporting counterparties such as swap dealers, and T+2 for smaller, less frequent reporting counterparties such as end-users.  This not only harmonizes with other regulators, but correctly puts the emphasis on swaps data being complete and in the appropriate format instead of focusing on speed.  The proposal further reduces burdens on end-users by removing the requirement for those counterparties to submit valuations of uncleared swaps on a quarterly basis.

Today’s proposal creates a mechanism for achieving better quality swaps data.  It standardizes validations across the different SDRs, empowers SDRs to apply validations and reject swaps, and clarifies that reporting counterparties have the onus to address errors causing any rejection in order to come into compliance.  This represents a robust attempt to ensure that reported swap data is complete, formatted in a standardized and harmonized manner, and accurate.

As envisioned by the original rules, the proposal utilizes current data to re-set block and cap sizes to more appropriately delineate the profiles of various products.  By applying the information we now have at our disposal, it was determined that additional categories for block transactions are necessary such that we might move away from the one-size-fits-all approach currently in place by differentiating between overall trading activity and transaction size of distinct products.   In general, the block size would increase, meaning that fewer transactions are eligible for block treatment.  This attempt to ensure that only the most appropriately sized transactions are publicly disseminated with a greater time delay also warrants consideration as to the suitable length of such delays to allow market participants to effectively transact in large size and hedge their position appropriately.  The Commission and staff have received divergent views on this topic since the inception of swaps data reporting.  The guiding statute requires consideration of “whether the public disclosure will materially reduce market liquidity.”[6]  Frankly, I do not know the right answer.  Today’s proposal represents an opportunity to further comment as the Commission attempts to address this difficult question.

Global Harmonization Efforts

Of particular importance to me is the attention that has been applied to advancing the pragmatic objective of global data harmonization in which regulators can effectively utilize the data for coordinated supervision efforts.  Otherwise, disjointed swap data may serve to hinder, rather than assist, implementation of post-crisis reforms.  International bodies, such as the Committee on Payments and Market Infrastructures (CPMI), the International Organization of Securities Commissions (IOSCO), and the Financial Stability Board (FSB) have achieved considerable progress with the development of technical guidance and standards for various identifiers and Critical Data Elements.[7]  This proposal wholeheartedly attempts to implement the Technical Guidance for Critical Data Elements and align CFTC policies as much as possible and where relevant with other regulators, such as the Securities and Exchange Commission (SEC) and the European Securities and Markets Authority (ESMA).  That being said, I am open to learning of other areas that could benefit from further harmonization while not hindering the agency from performing its regulatory duties.  I hope that our progress might encourage fellow international regulators also striving to implement these standards in a synchronized and expeditious manner.

Next Steps

The next crisis will not be the same as the last, nor will it be resolved any better or faster without harmonized data sets.  I ask market participants to view the proposal in that spirit and please provide constructive input on how we can make a good proposal even better.

Furthermore, the future finalization of these rules is not the last step in swap data reporting, as three other key components remain and require our attention.  First, the Commission, reporting counterparties, and SDRs will need to work together to prepare for an efficient implementation.  Second, attention should turn to the principles-based analysis and eventual granting of substituted compliance determinations with respect to swap data reporting regimes in other jurisdictions.  Third, the sharing of harmonized, high-quality swaps data with other domestic and international regulators to facilitate aggregation and oversight of global swaps markets should progress in earnest.

Thank you again to the staff for their hard work on the complex and technical challenge of swap data reporting.