The regulation of swap markets, as mandated by Dodd-Frank Act reforms, is predicated on transparency, reporting, and recordkeeping.  Swap execution facilities (SEF) registered with the CFTC are required under core principle 10 to maintain records of all activities, including a complete audit trail.  Commission regulations require a SEF to provide a confirmation of transactions to counterparties, including a written record of all of the terms of the transaction, and to obtain copies of underlying, previously negotiated agreements between the counterparties.

From time to time, the Commission learns that its regulations are technologically difficult to implement.  In those situations, it is prudent for the CFTC to revisit its regulations in order to keep pace with technology.  Revisiting our regulations provides a permanent fix, rather than temporary no action relief that is extended over and over again, as the Commission staff have done with SEF confirmation requirements for uncleared swaps.  This relief previously relieved SEFs of the requirement to obtain copies of the underlying, previously negotiated agreements between the counterparties.

As a general rule, I believe we need to be careful about proposing new rules that only codify no action relief from our regulation, particularly no action relief that has been extended for years.  Instead, we should determine what we were trying to accomplish with the regulation, if we still want to accomplish that, and if there is another way to achieve that.

As the sponsor of the Technology Advisory Committee, I believe that we should be forward looking in considering technological innovations to bring the right fix when it comes to areas where there have been technological obstacles to compliance with CFTC regulations.  Today, I support this rule because I support the idea that we need to fix what has become a technological obstacle. 

I look forward to public about whether this proposed fix is the right permanent fix from a technological standpoint.  I look forward to public comment on whether this fix locks in a system that may limit incentives for SEFs and other market participants to innovate using new technology that could provide copies of the underlying, previously negotiated agreements in compliance with the rule.  In our risk-based regulatory system, counterparties should know who they are dealing with, and doing so requires swaps participants to proactively revisit existing documents.  I am interested in public comment on whether the proposed fix would disincentivize SEFs from digitizing legacy documents and agreements, and requiring their market participants to do so as well.  I am also interested in public comment about whether these digitized documents could be machine readable.  

Digitized and/or machine-readable data could lower compliance costs, and increase transparency.  In the Financial Data Transparency Act of 2022, which does not apply to the CFTC, other federal financial regulatory agencies will be required to develop data collection protocols and standards for machine readability.  Other federal financial regulators will push this requirement to its registrants and supervised entities to collect, maintain, and submit data pursuant to these data transparency protocols and standards.  This will impact registrants in our space that are dual registered with those financial regulators, and who will need to comply with those protocols and standards.

I look forward to hearing from members of industry, investor and consumer advocates, academics, and other stakeholders on these questions.  I thank the staff for their work on this issue.