CFTC Commissioner O'Malia Supports Final Version of Reporting Rules
Fanni Koszeg | Bloomberg Law
The Commodity Futures Trading Commission (CFTC) recently finalized two rules at an open meeting held in Washington, D.C.: one on real-time public reporting of swap transactions and the other on reporting and recordkeeping requirements. These rules are meant to enhance transparency and provide the CFTC with necessary data for effective oversight of swaps markets. CFTC Commissioner Scott O’Malia supported the modified final rules in his opening statement.
Assessing the Value of New Rules through Cost-benefit Analysis
O’Malia argued that (1) making important swap transaction-level data available to market participants will increase transparency and improve price discovery and market integrity; and (2) regulatory reporting will enable the CFTC to fulfill its regulatory mandates, including market monitoring and systemic risk mitigation. He also pointed out, however, that according to cost-benefit analyses, the rules will impose costs of more than $100 million on the U.S. economy, and therefore, it was important to make sure that the overall benefits outweigh these costs. In his opinion, the final rules took important steps to “minimize the burdens” and “accommodate market participants’ valid concerns.”
Significant Changes in the Final Rules
O’Malia went on to analyze the significant changes in each of the rules that earned his support of the final versions.
— Recordkeeping and Reporting Requirements
An important change to the proposal is that the final rule takes a streamlined reporting approach where the reporting is to be done by the counterparty that has the fastest and cheapest access to data in the CFTC’s estimation. To eliminate redundant reporting, swaps executed on swap execution facilities (SEFs) or designated contract markets (DCMs), and then cleared, will no longer need to be reported to swap data repositories (SDRs).
A second beneficial change, according to O’Malia, is that the new rule allows an extended phase-in period for compliance and reporting based on differences between asset classes and types of counterparties.
A third revision will let market participants decide whether to report information on a lifecycle or snapshot basis for any asset class and allows counterparties to report data to an SDR in any electronic normalized format acceptable to the SDR. In O’Malia’s opinion, these changes “recognize industry practices and afford much needed flexibility to market participants.”
Finally, the CFTC held an all-day technology advisory committee meeting where those in charge of data standardization offered recommendations on data elements necessary to make reporting to SDRs successful. These include the creation of legal entity identifiers, unique swap identifiers, and unique product identifiers, as well as standards for data retention and storage in SDRs.
— Real-Time Reporting
O’Malia was “particularly skeptical of the real-time reporting rule when it was proposed in November 2010.” He considered the proposal overly vague and unconcerned with its potential effects on market liquidity. He remains concerned about the final rule’s complexity and its interconnection with an upcoming proposal regarding block trades, the treatment of which in the original proposal was much criticized by market participants. However, O’Malia argued that the final rule is significantly improved and provides adequate interim solutions for market participants.
In particular, O’Malia pointed out that the final rule provides more time for end-users to comply with the real-time reporting requirements. The rule also provides for the phasing in of longer time delays with respect to bilateral off-exchange swaps where at least one party is an end-user. These new rules take into account that, unlike swap dealers or SEFs, end-users may not yet have the resources and infrastructure necessary to report such swaps to SDRs.
A second new aspect addresses certain end-user concerns regarding the public disclosure of swap data for transactions where the underlying asset is in the “other” commodity asset class. Accordingly, the final rule requires the public disclosure of the full underlying asset with respect to (1) any swap executed on an SEF or DCM, (2) any swap where the underlying asset is one of 28 contracts from the CFTC’s final rule on position limits plus Brent, and (3) any swap that is economically equivalent to one of the 29 contracts. Hence, swaps where the underlying asset is in the “other” category are not subject to the real-time reporting rules for now.
Finally, O’Malia appreciated that a revised definition of “publicly reportable swap transaction” requires that only new swaps that are executed at arm’s length be disseminated publicly. This addresses a concern voiced by a number of end-users that disclosing inter-affiliate swaps that are not in this category would not enhance price discovery but would confuse markets.
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