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CFTC Kicks Can on SDR-Reporting Reform

The US Commodity Futures Trading Commission hopes good things come in threes as it has offered a second 90-day comment-period extension for proposed changes to Certain Swaps Data Repository and Data Reporting Requirements.

The proposed amendments would alter the policies and procedures established by the SDRs to confirm the accuracy of swap data with both counterparties to a swap as well as amend parts 23, 43, 45, and 49, to provide enhanced and streamlined oversight over SDRs and data reporting generally.

First published in the Federal Register on May 19, 2019, the initial comment period was to end on July 29, before the Commission granted an extension to October 29 and finally to January 27, 2020.

Since opening the proposed rule change for comments, the Commission has received only nine comment letters and held three ex parte meetings, which included representatives of the CME Group, the Depository Trust & Clearing Corp., Global Financial Markets Association, the Intercontinental Exchange, the LCH, and the Securities Industry and Financial Markets Association.

Initial industry feedback has been consistent among industry bodies and individual firms.

Walt Lukken, FIA

“The Futures Industry Association believes that the Commission should not consider imposing further verification requirements until it has finalized and implemented amendments to streamline data fields and leverage existing SDR validation processes,” wrote Walt Lukken, president and CEO of FIA.

Lukken also recommended that the Commission should take a principles-based approach if additional verification of swaps data is required as well as drop the proposed obligation to notify the Director of DMO if a reporting party cannot remediate an issue with a specific period.

The Coalition of Physical Energy Companies was also against imposing new obligations on non-reporting parties and wanted to limit the new burdens on those parties that report infrequently.

The industry body was wary of the proposed rule in which the SDRs would send “open swaps” reports to a non-registrant reporting party who is then obligated to verify the accuracy of the data within 96 hours.

COPE members are typically are non-reporting parties that do have significant staff resources to validate the data, wrote David Perlman, a partner at Bracewell, and counsel to COPE.

Instead, COPE suggested that “a reporting party that reports an average of 50 or less swaps per month not be required to engage in the verification of open swaps.”

Prudential Global Hedge Management also sought relief from the proposed rule change for those firms involved in inter-affiliate trades.

“From a policy perspective, inter-affiliate trades are not as critical to the goals of the swap data reporting rule for providing pricing and information transparency to the broader marketplace,” wrote Michael Long, president at Prudential Global Hedge Management. “The benefits of verifying inter-affiliate trades are outweighed by the burden to the end-user reporting counterparty.”

If the Commission felt the necessity of validating data regarding such trades, Long suggested that data validation happen semi-annually instead of monthly, and the Commission lengthen the response period to two business weeks rather than the proposed 96 hours.

Meanwhile, global financial advisory and technology provider Chatham Financial “believes that there are less burdensome ways for the Commission to improve the accuracy of swap data reporting while lowering the burden for all reporting counterparties, including non-swap dealers and end-users,” wrote Laura Grant, COO of Chatham Financial.

The firm recommended that much of the data validation takes place at the SDRs when the trades are first reported, such as making sure that the fields for parts 43 and 45 are populated correctly.

Chatham tested a few SDRs in June and found that some SDRs would accept reports where many of the fields mandated by Part 45 were left empty and did not receive a rejection notice.

“This means that swaps can be reported to and accepted by some SDRs without including a significant portion of Part 45 required data points,” wrote Grant.

Chatham further suggested that SDRs validate data regarding its type to prevent parties from entering text into a numeric field or only permitting the use of allowable values and rejecting the report if other values were in the field.

“If the Commission chooses to finalize the verification process outlined in proposed §49.11, the verification should be limited to open swaps reports as currently proposed,” she added. “The Commission should not expand the scope of the verification process to include all swap data messages.”