CFTC Excuses Reporting of Limited Swap Reporting Errors
Commentary by Steven Lofchie
In a no-action letter, the CFTC Division of Market Oversight ("Division") relieved reporting swap counterparties and swap markets from a requirement to submit data error correction notifications for errors that affect no more than five percent of their open swaps in a given asset class.
In the letter, the Division explained that CFTC Rules 43.3(e)(1) ("Method and timing for real-time public reporting") and 45.14(a)(1) ("Correcting errors in swap data and verification of swap data accuracy") establish swap reporting obligations for Swap Execution Facilities ("SEFs"), Designated Contract Markets ("DCMs") and reporting counterparties. The rules require these entities to correct any swap data reporting error as soon as technologically practicable, and in all cases within seven business days of discovery. Under these rules, if a reporting entity determines it will be unable to meet this deadline, it must notify the CFTC within 12 hours. By this no-action letter, the Division excuses this requirement so long as the counterparty makes a reasonable determination that the number of reportable trades affected by the error does not exceed the five percent threshold by asset class.
Industry associations (ISDA and SIFMA), who requested the relief, argued that: (i) the notification requirements impose a substantial resource burden on reporting counterparties; (ii) even immaterial errors may take longer than seven business days to correct, particularly where they involve coding issues; and (iii) CFTC staff are "inundated" with notifications, making the volume of submissions operationally overwhelming.
In the letter, the Division acknowledged that submitting swap reporting error notifications imposes an unnecessary burden on reporting counterparties, as the notifications have not been "utilized as originally intended."
Commentary
This is the third grant of meaningful regulatory relief by the CFTC staff in less than two weeks. (See also, CFTC Allows SEF to Operate without Offering "Order Book" and "CFTC Withdraws Advisory on SEF-Related Prime Brokerage Arrangements.")
None of these actions are material in the sense of changing the markets. Rather, to use the words of this no-action letter, they are all just responses to regulatory requirements that have not worked "as originally intended."
These actions are further demonstrations of a cultural shift at the financial regulatory agencies toward a pragmatic assessment of what is working and what is burdensome. These grants of relief also demonstrate how much relief can be accomplished by staff action that is short of full-scale rule repeal.