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19 June 2019
The Commodity Futures Trading Commission (CFTC) has proposed the first instalment of a series of amendments to its rules relating to swap data repositories (SDRs) and the reporting of swap data.(1) The proposed amendments, which would affect Parts 23, 43, 45 and 49 of the CFTC's regulations, implement the CFTC's Roadmap to Achieve High Quality Swaps Data(2) and are intended to improve the quality and accuracy of data available to the CFTC and the public and to streamline data reporting.
Following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the CFTC adopted a series of regulations to implement the Dodd-Frank Act's swap data reporting requirements and address:
The swap data reporting requirements have collectively required the development of a complex reporting infrastructure, including the establishment of SDRs and adoption of systems and procedures for market participants to record, track and report swap data to SDRs. As the reporting framework has evolved, market participants have expressed concern about the complexity and costs of the requirements and about the accuracy and utility (for both the CFTC and the broader public) of the data collected and reported. In addition, as broadly similar – but not identical – reporting regimes have been adopted in other jurisdictions, market participants have sought greater harmonisation of reporting requirements. The CFTC has contributed to efforts internationally and launched internal working groups in order to improve the verification of swap data accuracy.
As part of these efforts, the CFTC launched the roadmap in July 2017. The roadmap calls for a comprehensive review of the agency's swap reporting regulations and solicits feedback from market participants on improvements to data reporting without imposing unnecessary burdens.
This proposal is the first of three phases of the roadmap.
Correction of swap data errors and omissions
The CFTC is proposing to clarify and expand the general requirement that an SDR correct errors and omissions in swap data that had previously been reported to the SDR (or had failed to be reported). The SDR would be required to correct the data regardless of whether the swap is an open swap.(3) SDRs would also be required to disseminate corrected data "as soon as technologically practicable" once the data has been corrected.
Additionally, any swap execution facility (SEF), designated contract market (DCM) or reporting counterparty that becomes aware of any error or omission in data that it previously reported (or failed to report) to an SDR would be required to submit corrected swap data to that SDR. Such data must be corrected regardless of whether the swap has been terminated, matured or is otherwise no longer an open swap.
If a reporting counterparty repeatedly discovers errors or omissions, the CFTC expects that the reporting counterparty will evaluate its reporting systems and work with the SDR to improve its data reporting.
Swap data verification
The proposal includes a general requirement that SDRs verify the accuracy and completeness of swap data received from SEFs, DCMs and reporting counterparties, or third-party service providers acting on their behalf.(4) The proposal would also require SDRs to establish and maintain policies and procedures for swap data verification.
In order to fulfil the swap data verification requirements, the CFTC has proposed requiring SDRs to submit to each reporting counterparty an open swaps report that includes the swap data maintained by the SDR for all of the reporting counterparty's open swaps. Open swaps reports would have to be distributed to swap dealer, MSP and derivatives clearing organisation (DCO) reporting counterparties on a weekly basis and to all other reporting counterparties on a monthly basis.
Reporting counterparties would be required to respond to the open swaps report either by verifying the accuracy of the data or notifying the SDR of any discrepancies, pursuant to the SDR's verification policies and procedures. This verification or notice would have to be sent in response to every open swaps report received from an SDR within 48 hours for swap dealer, MSP or DCO reporting counterparties or 96 hours for all other reporting counterparties.
The proposed amendments would also standardise calculation approaches and data required for open swap reports. The amendments would give the SDR and its reporting counterparties some flexibility to determine the means of communication of open swap reports.
The proposal would clarify certain obligations of an SDR's chief compliance officer (CCO). Specifically, the CCO would be expected to have the authority to develop and enforce the SDR's policies and procedures, and the proposal would clarify that the CCO must take only "reasonable steps" to resolve any "material" conflicts of interest that may arise. It would also require an SDR to establish policies and procedures to handle and resolve non-compliance issues identified by the CCO.
The proposed amendments would also streamline and clarify the requirements of the SDR annual compliance report (ACR). The proposal would increase the amount of time that the SDR must submit the ACR from 60 calendar days to 90 calendar days following the end of the SDR's fiscal year. It would also replace the presently required comparison of all applicable CFTC regulations to each SDR policy with a more targeted requirement to describe and assess the effectiveness of SDR policies and procedures.
Among other changes, the proposed amendments would also:
Comments on the proposed amendments must be submitted by 29 July 2019.
The current proposal would impose new requirements on SDRs and reporting counterparties, particularly regarding verification and error correction. These changes have the goal of improving swap data accuracy but will likely require new infrastructure and may impose new costs on market participants. It may also be difficult at this stage to fully assess the impact of the proposal, as the other rulemakings relating to the roadmap have not yet been proposed. However, the CFTC has stated that it will reopen the comment period for this proposal after the CFTC proposes the next two rulemakings to implement the roadmap.
For further information on this topic please contact Donna M Parisi, Geoffrey B Goldman, Azam H Aziz or Jennifer Oosterbaan at Shearman & Sterling LLP by telephone (+1 212 848 4000) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com). The Shearman & Sterling LLP website can be accessed at www.shearman.com.
(1) Certain Swap Data Repository and Data Reporting Requirements, 84 Fed Reg 21044 (13 May 2019).
(3) The CFTC proposes to define 'open swap' as "an executed swap transaction that has not reached maturity or the final contractual settlement date, and has not been exercised, closed out, or terminated".
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