In this commentary written for MarketVoice, two London-based experts on regulatory reporting for derivatives offer their insights on the development of new reporting standards in the US and the shift towards a more prescriptive approach.
The recent announcement by the US Commodity Futures Trading Commission to delay the implementation of its ‘ReWrite’ of the OTC swap derivative reporting rules until 5 December 2022 will see many swap dealers and swap participants breathing a sigh of relief.
The CFTC ReWrite has been a long time in the making and sees the US regulator undertaking a complete revision of the reporting rules including newly defined fields, different message types and revised reporting timelines. While the new rules reflect many practical suggestions made by the industry during years of dialogue with the CFTC, it will take much time and effort to bring reporting systems into compliance.
The revised CFTC reporting rules also contain new verification and notification requirements, which are a significant concern for many firms. These verification and notification rules see the US regulator entering uncharted territory by legislating that firms need to verify the "accuracy and completeness" of all their data in the Swap Data Repository (SDR) versus their internal systems and records. Firms need to do this at least once every 30 to 90 days depending on the size and nature of the firm. And as soon as any issues are detected they need to fix those issues as soon as possible and notify the CFTC in writing if they cannot fix the issues in a "timely" seven-day period from discovery of each issue.
We’ve seen other regulations mandate reconciliations and controls. But this is the first time a major transaction reporting regulation is dictating such a draconian timeline and placing firms on the hook for self-reporting a “failure to timely correct”. Given that in many cases it will be impossible for the firms to correct the issues within that seven-day window, it’s clear that the CFTC is not messing around here. The regulator clearly wants firms to report correctly in the first place, improve their controls and make data accuracy a top priority.
The delay in the ReWrite implementation is a window for reporting firms to assess their data and test their reporting solutions and controls to find and correct as many issues as possible before being on the hook for notifying the CFTC of these issues.
From principles to prescriptions
In order to understand the context for this delay – and the significance of these new rules – we need to first take a look at how we got here.
After the 2007/08 financial crisis, the CFTC was the first off the mark among the G20 regulators in terms of implementing mandatory reporting of OTC derivatives. It opted for a principles-based approach based on the pragmatic view that the practitioners in the market were best placed to determine what data should be reported. Unfortunately, this led to different fields, different values and different rules across the asset class and SDR focused practitioners. The net result of this was that when it came to aggregating the data from all the SDRs the CFTC had real challenges getting a clear view of the systemic risk.
Making matters worse was the fact that other G20 regulators implemented different reporting requirements. When it came to the regulators comparing their data with another jurisdiction's data, basically all bets were off, and interoperability was practically impossible. The CFTC is on record acknowledging these challenges and noting that other regulators, the European Securities and Markets Authority in particular for EMIR, had implemented more prescriptive rules that led to higher data quality.
Above the individual jurisdiction level of the regulators, supranational bodies such as the Committee on Payments and Market Infrastructures, the International Organization of Securities Commissions, the Bank for International Settlements, and the Financial Stability Board have been working diligently on new standards and recommendations to improve harmonisation of OTC derivative reporting. These include CPMI-IOSCO’s initiative, called Critical Data Elements or CDE, to define common fields with global definitions for use in reporting. Standards for harmonising Unique Transaction Identifiers (UTI) and the development of standards for Unique Product Identifiers (UPI) are also emerging and becoming adopted more widely.
These global harmonisation efforts along with lessons learned in other reporting regimes have therefore informed the CFTC's efforts to move to far more prescriptive data standards for reporting. But as the EMIR experience showed, with the various revisions that ESMA had to implement, getting prescriptive reporting right is very difficult. Which is why over six years after starting the ReWrite, the CFTC finds itself having to further delay its implementation date.
Well-defined data standards have many benefits. The SDRs all have clear guidance and accept the same formats. This makes it easier for the regulators to consume and process the data. It also benefits the reporting firms as there is a common understanding of what needs to be reported and the industry can work on common interpretations and best practises.
But all these benefits are predicated on getting those prescriptive rules right and not creating scenarios where it becomes difficult or impossible to report correctly. The CFTC has been learning this lesson the hard way, with trade associations and reporting firms questioning many aspects of the Part 43 & 45 Technical Specification.
Looking further afield
Authorities in market centres such as Australia, Singapore, Hong Kong, Japan, the European Union and the United Kingdom all have ongoing programmes to harmonise to CDE guidance as well as introducing sensible practices such as standardised XML ISO20022 reporting formats and standardising the product information via the adoption of UPIs.
Prior to this, regulatory authorities would take note of other regimes, but very much at arm’s length, essentially exercising a siloed approach from neighbouring regimes. A welcome development has been the increasing use of further guidance and explanatory documentation from regulators. These global movements towards more harmonised reporting formats in different jurisdictions will undoubtedly require a lot of effort and attention for the reporting firms as they are rolled out over the next few years. But in the longer term having more consistent reporting rules and data standards will ultimately benefit both the firms and the regulators. That goal of interoperability of data and regulators in different jurisdictions being able to compare their respective data in a more ‘apples to apples’ style will be a great achievement.
Extending to ETD
Whilst reporting harmonisation tends to focus on OTC derivatives, it’s worth noting that this will also result in significant changes for exchange-traded derivatives. EMIR Refit initiatives in both the UK and the EU include enhanced proposals that extend CDE guidance across ETD reporting.
Not all ETD reporting firms will agree that the benefits of improved data quality are worth the development burden and implementation costs. Indeed, many ETD reporting counterparties still champion the sensible notion of requiring the exchange to report such derivatives on behalf of trading firms, although sadly that notion is an outcome we are unlikely to see.
Beyond immediate implementation, firms will hopefully witness other fruits for their labour. The use of UPIs will standardise and decrease the volume of reportable fields. Also standardised XML submission message formats provide a ‘level playing field’ for reporting, meaning greater flexibility with regard to the choice of trade repository, and ultimately fostering competition and portability between such reporting venues.
There are some notable barriers, however, with regard to global reporting data harmonisation. As reporting regimes mature, the degree of divergence across different jurisdictions will inevitably ripple outwards. This has already been seen with the Financial Conduct Authority's regulatory oversight of UK EMIR, with small but significant differences in the validation rules compared to ESMA’s EU EMIR. These small differences will lay grounds for much wider change as both regimes implement their own flavour of the EMIR Refit. Both the FCA and ESMA have promoted good intentions of aligning the two ‘refits’ as similarly as possible.
So ironically, as we see reporting regimes like the Australian Securities and Insurance Commission, the Monetary Authority of Singapore, and the CFTC becoming markedly more similar through harmonisation, we might see the two versions of EMIR created by Brexit start to diverge.
2022 might mark the 10-year anniversary of OTC derivative transaction reporting as measured from the commencement of CFTC reporting in late 2012. But with ReWrites, Refits and plain revisions that didn’t earn a sexy nickname all underway, it’s very clear that there’s a lot more work ahead as we endeavour towards reporting harmony.
By Alan McIntyre and Tim Hartley, Kaizen Reporting. Alan is an expert on regulatory transaction reporting across the Group of 20 countries. He worked for DTCC on its EMIR reporting rollout in 2014 and and played a key role in building its GTR reporting platform. More recently he helped DTCC by leading its Brexit programme and the rollout of separate FCA and ESMA trade repositories for EMIR and SFTR. Prior to dedicating himself to transaction reporting, Alan gained extensive capital markets experience having delivered change and operational roles at BlackRock, Barclays and State Street. Tim specializes in EMIR regulatory reporting. Prior to joining Kaizen, he was an EMIR and SFTR reporting specialist for Kroll. Before that he spent five years leading and developing the CME Trade Repository as global head of client services.
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