The US has seen a flurry of activity on the regulatory front recently. In a regulatory roundup, Michele Navazio, partner, Seward & Kissel LLP shares an update on some of the key regulatory developments impacting derivatives trade reporting and digital assets.
Swaps Data Reporting
In 2012, the Commodity Futures Trading Commission (CFTC) exercised its newly created rule making authority under Section 21(b) of the Commodity Exchange Act (CEA) and released initial rules outlining the “data elements” swap data repositories and swap market participants must use when reporting CFTC swaps.  Now, a decade later the “CFTC re-write” is in full swing. As the name suggests, the CFTC is updating Parts 43 and 45 of its swap data reporting and public dissemination requirements. This update is largely driven by a desire to harmonize global swap data reporting regulatory requirements, spearheaded by the efforts of the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions (CPMI-IOSCO), who released their “Harmonisation of critical OTC derivatives data elements (other than UTI and UPI)” in April 2018.
Like other large scale regulatory changes, the “CFTC rewrite” is being implemented in phases. Phase 1 went into effect on December 5, 2022, after being delayed from a May 25, 2022, compliance date. The key changes implemented in Phase 1 include: (i) standardizing all CFTC required fields that are collected by swap data repositories, (ii) requiring swap dealers and major swap participants to report collateral and margin data (similar to other global regulators); (iii) removing the requirement of smaller market participants to provide quarterly mark-to-market valuations on open positions; (iv) instituting new data verification and correction obligations for open, terminated or expired swaps that are within the retention period; and (v) requiring the submission of Swap Data Error Correction Notification forms for errors that cannot be corrected within specified time constraints. 
Fast forward to Q1 of 2023, and Phase 2 is top of mind for CFTC Chairman Rostin Behnam who remarked earlier this year during an industry event “No rulemaking agenda should be complete without data and reporting improvements…. the next major step towards data standardization and international harmonization is adoption of the Unique Product Identifier (UPI) to represent the underlying product of swap transactions.”  On February 24, 2023, the CFTC released its order mandating the use of Derivatives Service Bureau (DSB) issued UPIs in recordkeeping and swap data reporting. Registered entities and swap counterparties must comply with the new UPIs rules starting no later than January 29, 2024, for all swaps in credit, equity, foreign exchange, and interest rate asset classes. For market participants, the move to DSB issued UPIs should provide operational relief as the design of the UPI reporting systems follows the UPI Technical Guidance issued by the CPMI-IOSCO which is widely accepted by global regulators.
Separately the Securities Exchange Commission’s (SEC’s) Electronic Recordkeeping Requirements for Broker-Dealers, Security-Based Swap Dealers, and Major Security-Based Swap Participants went into effect on May 3, 2023.  These rules seek to align recordkeeping requirements with technological innovations by replacing “WORM” format (write once, read many format) records and implementing audit trail practices. SEC Chair Gary Gensler reiterated the importance of recordkeeping while announcing the rule amendments, saying, “Since the 1930s, recordkeeping obligations have been vital to maintain market integrity…Today’s rule amendments will facilitate the SEC’s ability to examine and inspect records consistent with modern technology.” 
As the reporting regimes for security-based swaps and CFTC regulated swaps continue to evolve, US regulators appear receptive to CPMI-IOSCO guidance which should create more efficient processes within the existing global regulatory structure.
As recent news headlines suggest, the popularity and risk of digital assets has gained the attention of US regulators. However, rather than propose rule making related to the evolving digital asset market, the SEC and CFTC have, to date, chosen to exercise their authority over the market through enforcement actions. Since January 2023, the SEC has charged or fined more than 10 organizations for allegations related to fraud, unregistered offerings, market manipulation and being an unregister dealer. It’s a similar story at the CFTC. According to the CFTC’s annual enforcement report, in FY 2022, 20% of their enforcement actions related to digital assets, and in 2023, to date, they’ve already filed charges against 5 organizations alleging fraud and market manipulation.
Registered Investment Advisors (RIAs) trading digital asset are also monitoring the outcome of the SEC’s proposed Safeguarding Rule (Proposed Rule). The Proposed Rule amends section 206(4)-2 of the Investment Advisors Act of 1940 to (i) expand asset classes covered, which would include digital assets; (ii) enhance custodial protections of client assets through robust “qualified custodian” requirements and (iii) update reporting obligations, notably under the Form ADV. SEC Chair Gary Gensler spoke of his support for the Proposed Rule saying, “through this expanded custody rule, investors working with advisers would receive the time-tested protections that they deserve for all of their assets, including crypto assets, consistent with what Congress envisioned.” Reaction to the Proposed Rule is mixed at best. Custodians, RIAs and industry groups understand the importance of protecting client assets but their comments to the Proposed Rule highlight the costs clients will ultimately bear through the impact of expanded custodial liability and advisor oversight requirements. Additionally, a RIA’s ability to trade digital assets could be impacted as most are traded on digital asset trading platforms that, under the Proposed Rule, are not considered “qualified custodians”. The comment period for the Proposed Rule ended May 8th, but based on the tenor of the comments submitted to the SEC we can expect significant changes to its final form.