by Allan D. Grody, President, Financial InterGroup Advisors
The Commodity Futures Trading CFTC recently released its Amendments to the Swap Data Recordkeeping and Reporting Requirements. In it they lay out the next steps in their earlier first mover initiative to embrace global data standards. Initially, the first regulator to embrace the legal entity identifier (LEI), the CFTC’s regulated entities now represents 90% of all LEIs issued in the US. These LEIs have been registered by two independent local operating units (LOUs) – Bloomberg and DTCC’s Global Market Entity Identifier utility (GMEI). They are part of a global network set up to register LEIs, first for swaps market participants and, later expanded to register all financial market participants who have reporting requirements for OTC swaps and most other financial transactions to regulators throughout the world.
Since 2012 the CFTC has championed the use of the LEI, and in order to fulfill US legislated requirements, created the Unique Swaps Identifier (USI) and Unique Transaction Identifier (UTI). All three identifiers were found necessary to report newly regulated over-the-counter (OTC) swaps transactions to the CFTC.
Since then global identity and data transaction standards have been supported by the G20, overseen by the Financial Standards Board (FSB) and further developed and implemented by a number of new financial industry infrastructure organizations. These include two centralized global entities, the Global LEI Foundation (GLEIF) for the LEI and the Derivatives Service Bureau (DSB) for International Securities Identification Numbers (ISINs) for derivatives; multiple decentralized entities, 33 LOUs to register LEIs and 25 Trade Repositories to accept reporting of swaps and other financial transactions; the existing International Standards Organization (ISO); and over 130 National Numbering Agencies who have embraced new responsibilities in expanding their services as LOUs and supporting the ISIN regime for derivatives.
The CFTC, early on in its attempt to oversee new OTC Swaps regulations embraced in the Dodd-Frank legislation, stepped out on its own to create the regulations and data codes to exercise its new responsibilities. At the same time the G20 handed over responsibility to its newly established FSB to create regulatory and data standards to assure stability of the financial system.
Later, the Bank for international Settlements (BIS’s) Committee on Payments and Markets Infrastructure (CPMI) and the International Organization of Securities Commissioners (IOSCO) proposed a set of 130 Critical Data Elements (CDEs) to harmonize swaps transactions that are being reported to swaps data repositories across the globe. Now, with most of these global initiatives nearly completed, the CFTC in its responsibility to oversee the US’s derivatives industry, appears comfortable to embrace these global standards as its own but with some caveats.
Here is a rundown ofthe data components of the amended regulation and excerpted paraphrased passages from it (the page number (s) in the Amended regulation is noted for accessing further detail):
LEI (Legal Entity Identifier)
A LEI is to be required for all significant swap’s financial entities (see list of categories below). Those that are currently ineligible to receive a LEI based on the standards of the Global LEI System must provide an alternate identifier.
At page 224
Each swap execution facility (SEF), designated contract market (DCM), derivatives clearing organization (DCO), swap data repository (SDR), and swap counterparty shall use legal entity identifiers (LEIs) to identify itself and swap counterparties in all recordkeeping and all swap data reporting. If a swap counterparty is not eligible to receive a LEI as determined by the Global Legal Entity Identifier System (GLEIS), such counterparty shall be identified in all recordkeeping and all swap data reporting pursuant to this part with an alternate identifier as prescribed by the CFTC.
At page 85
Because some counterparties, including many individuals, are currently ineligible to receive a LEI based on the standards of the GLEIS, such counterparty should be identified with an alternate identifier.
Renewals mandated only for 151 major regulated CFTC financial entities – Swaps Dealers (SDs), Major Swaps Participants (MSPs), DCOs, SEFs and SDRs
At page 188
The CFTC believes accurate LEIs are essential for the CFTC to use swap data to fulfill its regulatory responsibilities. Mandating LEI renewal assures reference data for each LEI will be updated on a periodic basis and, thereby, assuring the highest level of accurate information. In addition, LEIs have already been broadly adopted in swaps markets and their widespread use has shown promise by reducing ambiguity engendered by market participants previously using a variety of non-standard reporting identifiers.
However, the CFTC recognizes LEI renewals impose some costs, estimated at $50 per year per LEI. Therefore, to limit burdens for counterparties that are smaller or less-active in the swaps market, the CFTC has proposed limiting the renewal requirement to the estimated 151 SDs, MSPs, SEFs, DCMs, DCOs, and SDRs. These, the CFTC believes, have the most systemic impact on the its ability to fulfill its regulatory mandates.
Relationship Data (providing for a Parent/Ultimate Parent for each counterparty)
The CFTC has requested comments on reporting relationship data of counterparties on each trade and/or to Swaps Data Repositories on a periodic basis. Surprisingly, there is no reference in the Amendment to similar reporting and collection of LEIs to GLEIF for such parent/ultimate parent data, an ongoing yet unfulfilled initiative being conducted by the GLEIF
At page 136
The CFTC needs the ability to link swap counterparties to their parent (immediate and ultimate) to aggregate swap data to be able to monitor risk. The CFTC requests specific comment on whether this data could be reported as part of swap data reporting.
Given the static nature of these relationships, the CFTC requests comment on whether reporting counterparties should report parent and ultimate parent information for each swap trade or in a regularly updated (e.g., monthly or quarterly) reference file maintained by SDRs.
UTI (Unique Transaction Identifier)
Requiring UTIs to be substituted for Unique Swaps Identifiers (USIs)
The CFTC believes transitioning to the globally-standardized UTI system will benefit SDRs, SEFs, DCMs, and reporting counterparties by reducing the complexity associated with reporting swaps to or in multiple jurisdictions.
At page 185
The CFTC is requiring Unique Swap Identifiers for new swaps to be substituted for previously required USIs for: SD/MSP financial entities to generate UTIs for off-facility swaps; and permit SD/MSP/DCO reporting counterparties that are not financial entities to ask their SDR to generate UTIs for swaps.
UPI (Unique Product Identifier)
Reporting product-related data elements required by each Swaps Data Repository until UPIs are available
At page 133
The CFTC preliminarily expects UPIs will be available within the next two years. Until then the CFTC is proposing SDRs and counterparties continue to use the product-related data elements unique to each SDR. The CFTC believes this temporary solution would have SDRs change their systems only once when UPIs becomes available.
CDE (Common Data Elements)
Comments requested on requiring use of CDEs
At page 133
The CFTC is proposing to establish technical standards for certain swap data elements according to the CDE Technical Guidance, where possible. The swap data elements proposed to be reported to SDRs would consist of: the data elements implementing the CDE Technical Guidance; and additional CFTC-specific data elements that support the CFTC’s unique needs.