Swap Clearing and Reporting Requirements Should Be Prioritized, Capital Markets Committee Asserts
Jonathan D. Gupta, Bloomberg Law
The Committee on Capital Markets Regulation (Committee), a research organization focused on regulation of U.S. capital markets, provided the Commodity Futures Trading Commission (CFTC) recommendations on the timing for implementing certain provisions of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Three Core Principles
The Committee suggested that the first step in implementation involves defining key terms, including “swap,” “swap dealer,” and “major swap participant.” In addition, data standards should be established, including universal product identifiers and legal entity identifiers. For background on identifiers, see, e.g.,Bloomberg Law Reports®—Derivatives Law, Single Global Standard for Legal Entity Identifiers Discussed by Futures Industry Association (Feb. 8, 2011).
Following this initial step, three core principles should guide implementation, according to the Committee. The first priority should be reducing systemic risk. Second, rules should be phased in so as to avoid market disruption, and also to allow sufficient time for related operational changes. Finally, rules should be implemented in parallel, so that implementation in one area does not cause delay in other areas.
Clearing and Reporting
On the basis of these priorities, the Committee recommended that the first implementation step should be to establish central clearing of the most liquid, standardized products for which data and operational systems already are available and which already are being cleared to some extent. Before imposing mandatory clearing more broadly, the CFTC must, the Committee noted, first finalize rules for clearinghouses, such as margin, governance, financial resources, and conflicts of interest requirements, so that clearinghouses can be in compliance before mandatory clearing begins. The end-user exemption also should be finalized, to provide clarity for companies as to whether they must clear their derivatives. For background on the swap clearing requirement, seeBloomberg LawNotes®—Derivatives Law, Swap Clearing Requirement and the Dodd-Frank Act. The Committee recommended that there be a brief period of voluntary clearing for particular product sets, followed by mandatory clearing.
According to the Committee, parallel with implementing clearing, initial steps should be taken toward reporting data to regulators and the public. The Committee noted that reporting will help inform regulators on implementation of other aspects of Title VII, including how far to expand mandatory clearing. First steps should include reporting to swap data repositories and regulators, and reporting end-of-day prices to the public, according to the Committee. However, it noted that real-time public reporting should not yet be implemented, given the additional operational changes required. The Committee suggested that reporting should be phased in by asset class, frequency of reporting, and also the information to be reported (which eventually should include lifecycle events).
Swap Dealers and Trading Requirement
The Committee recommended that the next implementation step should involve rules concerning swap dealers and major swap participants, including registration, capital and margin requirements, and business conduct standards. The Committee suggested that, although these measures also will reduce risk, in its view they are secondary in importance to the introduction of central clearing. Following rules for swap dealers and major swap participants, the CFTC’s implementation should focus on trading, including requiring the use of swap execution facilities. For background on statutory requirements for these facilities,see Bloomberg LawNotes®—Derivatives Law, Swap Trading Requirement and Swap Execution Facilities.
Real-time Public Reporting
The Committee suggested that the final steps in phasing in rules should focus on real-time public reporting, followed by implementation of other elements of Title VII such as rules on position limits, portfolio compression, and the swaps push-out provision.
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