Swap Reporting is about to get easier!
On August 19th, 2015 the CFTC proposed sweeping revisions to the Commodity Exchange Act Section 21, Part 45 on how “cleared swaps” will be reported.
Over three years I moderated an energy industry roundtable focused on defining the impacts of Dodd-Frank Act regulations. Of the 25 organizations who participated, a reoccurring debate was related to uncertainty with the obligation of Continuation Reporting once a swap is cleared through a Designated Clearing Organization (DCO). No consensus was reached. Some moved aggressively with automation and attempts at regular reconciliation. Others plodded slowly relying on ad-hoc or delegated reporting. Once a Swap cleared, most organizations assumed the DCO was reporting on their behalf. Yet, many still felt uneasy and exposed.
Proposed Part 45 revisions aim to improve data integrity, reduce reporting redundancies and create a more efficient reporting process. As a result, it also clarifies confusion related to Continuation Reporting.
The greatest impact to market participant’s current processes, (and data systems), is that the proposed rule revisions will now bifurcate a swap cleared with a DCO into an “Original Swap” and two offsetting “Clearing Swaps”. The simplest explanation for this rule change is that in the current Swap clearing transaction lifecycle, the DCO offsets the bilateral Swap with new swaps between the DCO and each transacting party. When this occurs, the bilateral Swap is extinguished and one transaction now becomes three.
The proposed rules more accurately reflect how DCOs clear a swap. However, the rule revisions will also impact the socialized practices of market participants. Despite knowledge of how a swap is cleared, few commonly “think of” a cleared swap as two offsetting transactions and many CTRM systems represent these trades as a single or two manually entered transactions.
Organizations that made investments in compliance reporting may find themselves with a sunk cost and need for reinvestment. For the slower movers it should provide relief and a fresh start to refine compliance processes.
To summarize the proposed rule changes:
- The CFTC will introduce two new defined terms.
- Original Swap – the swap that is accepted for clearing by the DCO whether executed bilaterally, through a Swaps Execution Facility (SEF) or Designated Contract Market (DCM).
- Clearing Swap – the swap(s) created by the DCO, where the DCO becomes the counterparty to the swap and the Original Swap is offset. It also includes any Swaps executed directly with the DCO for clearing.
- The DCO is now the reporting party for the Clearing Swap. As a result the DCO will be accountable for reporting Creation and Continuation Data.
- The SEF, DCM or Reporting party will be responsible for reporting Primary Economic Terms (PET) of the Original Swap. Confirmation Data reporting will be eliminated if the Original Swap is accepted for clearing.
- The SEF or DCM will be responsible for designating which SDR the Original Swap is reported. If bilateral, the Reporting Party will choose the Swap Data Repository (SDR).
- The DCO will be required to report all data for a particular Clearing Swap to a single SDR. In a CFTC example, the SDR for the Original and Clearing Swap is the same.
- The DCO will be responsible for reporting termination of the Original Swap and Continuation Data for the Clearing Swap; alleviating years of reporting consternation by market participants.
- More emphasis will be placed on assuring that the Legal Entity Identifiers (LEI) and Unique Swap Identifier (USI) are reported so that the SDR can better track reporting through the lifecycle of a transaction and eliminate inadvertent duplication.
- Swap Dealers and Major Swap Participants will be relieved by the DCO for reporting daily valuation of Cleared Swaps.
- Clarity over USI creation by the DCO and additional PET fields are also defined in detail.
The rule changes should be a net benefit to market participants by greatly reducing the rigor of daily reporting requirements and inconsistencies around continuation reporting. However, the near term impact will require new investment into systems and changes in policies and procedures. Despite the 60-day comment period, (and the fact we have seen these comment periods slip sometimes for years (e.g. position limits, margining)); there is high probability that after a few sharpened pencils the rules will be adopted. It is time to mobilize.
Which leads to a new question, how will these additional transactions impact Swap Dealer and Major Swap Participant Thresholds?
As a special gift to readers, I drafted a transaction lifecycle map that illustrates the decision and impact points of these proposed changes through the lifecycle of a transaction. If you are interested in receiving this document, please request on the contact page.
Please also share your comments and questions, with particular interest in how you see the rules impacting your organization. Meanwhile, if you like what you have read please like this blog and repost to your social media! If you would like more updates, please sign up below! Thank you.