CFTC Proposes Amendments to Swap Data Recordkeeping and Reporting Requirements for Cleared Swaps
Commentary by Bob Zwirb
The CFTC voted unanimously to amend regulations to provide additional clarity to swap counterparties and registered entities regarding their reporting obligations for cleared swap transactions. The proposed amendments would also "improve the efficiency of data collection and maintenance associated with the reporting of the swaps." The proposed amendments would modify Part 45 of the CFTC's regulations, which implements the requirements of Section 21 of the Commodity Exchange Act. The CFTC stated that the proposed rules would:
- Clarify which entity has the obligation to choose the swap data repositories ("SDRs") to which creation data is reported;
- Clarify the creation data reporting obligations for swaps created pursuant to the rules of a derivatives clearing organization ("DCO") that has a DCO as a counterparty;
- Eliminate confirmation data reporting obligations for swaps that are intended to be submitted to a DCO for clearing at the time of execution;
- Clarify DCO continuation data reporting obligations for swaps that are accepted for clearing, including the obligation to report terminations to the SDR to which the swap was originally reported;
- Clarify DCO obligations to report data providing for the linking of swaps involved in cleared swap transactions;
- Codify no-action letters by proposing the elimination of the requirement for swap dealer / major swap participant counterparties to report daily valuation data for cleared swaps;
- Clarify a DCO's obligation to create, transmit and use unique swap identifiers for swaps created pursuant to the rules of a DCO that has a DCO as a counterparty;
- Clarify that the DCO will be the reporting counterparty for swaps created pursuant to the rules of a DCO that has a DCO as a counterparty;
- Clarify that all swap data for a given swap created pursuant to the rules of a DCO that has a DCO as a counterparty, as well as all swap data for each such swap that replaces a particular swap that is accepted for clearing, must be reported to a single SDR;
- Modify and supplement the data fields of primary economic terms in Appendix 1 to part 45 to account for the clarifications described above.
Todd Zywicki, "Making Financial Regulation AntiFragile," Book Review, Library of Law and Liberty (Dec. 2013), available here.
Click here to view an additional summary by the Delta Strategy Group.
See: CFTC Notice of Proposed Amendments to Swap Data Recordkeeping and Reporting Requirements for Cleared Swaps; CFTC Press Release; CFTC Fact Sheet on Proposed Amendments.
See also: CFTC Chair Massad's Statement; CFTC Commissioner Bowen's Statement; FTC Commissioner Giancarlo's Statement.
Related news: CFTC Requests Comments Regarding Swap Data Recordkeeping and Reporting Requirements (Fed. Reg.) (August 7, 2015); SIFMA AMG Submits Comments Regarding Review of Swap Data Recordkeeping and Reporting Requirements (with Lofchie Comment) (May 28, 2014).
Commentary
As a result of Dodd-Frank, an enormous amount of transaction-level data relating to the multitrillion-dollar swaps market will flow to regulators. But the question we should think about is whether this data will allow regulators to build an effective early-warning system, or will it, in the words of one observer, simply allow them "to count the raindrops during a hurricane?" For the swap reporting regime to succeed, regulators must not only collect all the relevant information, they must be able to make sense of it, and further know what to do with it. This is what the Wall Street Journal calls the "fantasy of regulatory omniscience." "Speech of the Year: A regulator, of all people, shows how complex regulations contributed to the financial crisis, Wall St. J. (Sep. 14, 2012).
Certainly the experience of the Federal Reserve Board on this score doesn't exactly inspire confidence. Compared to other financial regulators, the Fed had much better information about the condition and positions of its regulated entities before the financial crisis. Yet this comparative advantage did not allow the Fed to forsee the coming crisis and intervene in time to prevent it. Alan Greenspan, "Never Saw It Coming: Why the Financial Crisis Took Economists By Surprise," Foreign Affairs, at 89 (Nov-Dec 2013).
The problem, as law professor Todd Zywicki explains, is not with the amount of information that is available to regulators, but with how they interpret that information:
Roughly put, the animating myth of the past century is that with scientific management and enough data it is possible to prevent bank failures and to "manage" the economy to prevent unexpected shocks to the system. But . . . simply having more information and data hasn't and won't by itself do anything to staunch bank failures. We have never before in human history had as much data about the financial system as the period preceding the 2008 financial panic yet our Washington and Wall Street solons were still blindsided by it. Yet this copious trove of data did not prevent the crisis-indeed, one suspects their blindness was in part hubris caused by having access to so much data. Yet the pretense of Dodd-Frank is that somehow getting "more information" to a centralized panel of wise regulators (the Financial Stability Oversight Commission) will enable them to take the correct actions to stave off the next crisis. Yet the problem that caused the 2008 panic was not a lack of information, which was plentiful, but the sense to know how to interpret the information-and, in particular, the reality that at the time there was no one single correct way to interpret the information. But still the myth persists that with enough information and wise regulation we can prevent bank failures.