Statement of Commissioner Dan M. Berkovitz on Proposed Amendments to Parts 45, 46, and 49: Swap Data Reporting Requirements

February 20, 2020

Introduction

Collecting swap data is crucial to fulfilling the purposes of the Commodity Exchange Act (“CEA”), including “insur[ing] the financial integrity of all transactions subject to this Act and the avoidance of systemic risk.”[1]  The 2008 financial crisis showed how a lack of transparency in swap trading, and regulators’ inability to monitor risk, can create fertile ground for the accumulation of excessive risks.

The Commission must collect appropriate swap data to fulfill its statutory mandate.  The data must be accurate and sufficiently standardized so that the Commission can easily aggregate and analyze the data reported to different swap data repositories (“SDRs”).  The Commission must be able to determine how different derivatives categories and products are being traded, as well as the positions and risks that different market participants are taking across the entire swaps market.  I support today’s Proposal to amend the Part 45, 46, and 49[2] reporting requirements because it would improve the standardization and accuracy of swap data reported to SDRs, and would thereby strengthen the Commission’s ability to oversee swap markets.  I commend the many CFTC staff members who have spent years reviewing swap data and helped improve the data reporting framework.

In addition to obtaining accurate data, the Commission must also develop the tools and resources to analyze that data.  The Proposal, which focuses on the quality and reporting of data, does not address in any detail the actual use cases for the data that would be collected or the analytical needs for swap risk management oversight.  Regrettably, the Commission has yet to set forth with any specificity how it intends to use this swap data to evaluate or address systemic risk.  More generally, the Commission has not devoted enough attention to the important task of building a risk monitoring system for swaps.  In my view, this effort should be a high priority.  I encourage market participants and members of the public to comment on the Proposal and on the particular questions noted below.

The Proposal

In 2010, Congress enacted the Dodd-Frank Act and codified swap reporting reforms consistent with international goals of ensuring that swap reporting and review is “sufficient to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.”[3]  In 2012, the Commission was the first major jurisdiction to adopt swap data reporting rules.[4] 

The Proposal would amend those existing rules to simplify reporting obligations, increase data quality, and partially harmonize specific data elements and taxonomies with new international standards.  It would reduce the number of potentially duplicative reports sent to SDRs by condensing basic reporting obligations into “creation” and “continuation” reports for all swaps and eliminate repetitive daily “state” data reporting of the same data for most existing transactions.  SDRs would also be required to validate the data they receive.  I support these efforts to improve swap data reporting.

The Proposal would also extend swap data reporting deadlines to T+1 (reporting required one day after the day the trade is executed) for swap dealers, major swap participants, swap execution facilities, designated contract markets, and derivatives clearing organizations (“DCOs”).  Other reporting counterparties would be required to report no later than T+2.  This change is expected to increase data accuracy, as it would allow time for reporting parties to verify their data before submission to an SDR.  The tradeoff is that the Commission will not receive data nearly instantaneously, which could constrain the Commission’s ability to undertake real time monitoring of risks in times of market stress.  It is my understanding, however, that to date such monitoring has not been possible.  I encourage public comments on these proposed reporting deadlines, including whether the full amount of T+1 or T+2 is necessary to achieve accurate reporting and is compatible with the Commission’s market and systemic risk oversight responsibilities. 

The Proposal also would impose a new requirement for swap dealers, major swap participants, and DCOs to report margin and collateral data each business day.[5]  It would specify certain margin and collateral data elements, including the value of initial margin posted and received by the reporting counterparty, the value of variation margin posted and received, and the currency of posted margin.[6]  The uncleared swaps margin rules are one of the most important risk-mitigation requirements added after the 2008 financial crisis and collecting margin data is important for the Commission to monitor risks and check compliance with the rules.

However, it is not clear whether the collateral data to be collected would be sufficient for the Commission’s purposes.  Without exposure data, the Commission may not be able to assess whether the amount of collateral collected offsets the risks posed by swaps or verify compliance with the uncleared swap margin rules.  For these reasons, I ask that commenters address whether reporting of exposures or other data elements related to margin should be included in this rule or in other reporting requirements, or alternatively, whether the CFTC should be able to undertake the appropriate analysis with other data it already collects. 

More Focus Needed on Data Analysis

As a CFTC Commissioner, I am often asked how we use SDR data, and whether the Commission has the institutional focus to leverage the unprecedented amounts of information at its disposal.  The Commission requires that every swap subject to its jurisdiction be reported to an SDR, and that the data be updated throughout the entire swap lifecycle.  Tens of millions of swap data records are received by SDRs monthly.  Market participants are justified in asking what the Commission does with so much data. 

Systemic risk monitoring, market integrity, and the protection of market participants are fundamental purposes of the CEA.  Comprehensive data sets and sophisticated data analysis are indispensable to the Commission and indeed to any modern financial regulatory agency.  For decades the CFTC has been analyzing futures and options data on a daily basis to monitor risk and margin sufficiency in those markets.

The Commission needs to identify and articulate how it will use swap data to meet its mandates.  While general goals are often stated, the Commission needs to identify the specific risks it is measuring and monitoring and the information that should be made available to the public to improve market transparency.  The Commission should be able to identify which data elements allow the Commission to specifically monitor for market risk, liquidity risk, and credit risk, for example, and how those elements are used for that purpose.  We should describe how specific data elements will improve the accuracy of the weekly swaps report and bring greater transparency for market participants.  The Commission should map the data elements in the Proposal to these uses and others to explain in a comprehensive manner[7] how they will be used and why they are needed.   

I urge the Commission to focus more resources on swap data analysis so that we can maximize our use of the reported data to help mitigate risks before they become a full blown crisis.  While data is the necessary foundation of any good risk monitoring program, more must be done.  The Commission must also develop a more comprehensive capacity to measure and monitor risk.  It must identify how it will achieve specific swap analysis objectives, the data needed for such objectives, and the information technology and human resources needed to execute its vision.     

Conclusion

Part 45 and the proposal’s swap data elements are generally focused on the reporting of individual swap transactions, as specified in CEA section 2a(13)(G).  I support the Proposal because it will standardize and improve the reporting of quality swap data.  This is both necessary and appropriate; high quality data is the foundation upon which needed data analysis for risk monitoring and greater transparency are built.  I encourage public comment on whether the 116 data elements in the proposal are sufficient to understand the market, counterparty, and systemic risks associated with individual swaps and with each market participant’s swap book and aggregate exposures.

I thank the staff of the Commission, and particularly the Division of Market Oversight, for their work on the Proposal and for their constructive engagement with my office.  I look forward to public comments, and to a more complete articulation by the Commission of how it will use the swap data that would be collected to fulfill its congressionally mandated mission.  

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