The Depository Trust & Clearing Corporation (DTCC) today filed a comment letter urging the U.S. Commodity Futures Trading Commission (CFTC) to reject The Chicago Mercantile Exchange Inc.’s (CME) proposed Rule 1001, which would alter the already established regulatory reporting structure for over-the-counter (OTC) derivatives. The proposed rule would inappropriately tie CME’s swap data repository (SDR) and clearing services and eliminate the ability of market participants to choose their preferred SDR.
“The Commission’s approval of CME’s Rule 1001 would decrease transparency for investors and regulators, increase risk in the financial system, and undermine the core principles of the Dodd-Frank Act. CME’s Rule 1001 not only significantly diminishes the ability of regulators and investors to rely on the integrity and accuracy of market data, but it also ignores the Dodd-Frank Act’s Congressional mandate against anticompetitive behavior,” stated the letter, which was signed by DTCC General Counsel Larry Thompson.
CME’s proposal would alter well-established rules promulgated by the Commission to date and disrupt the significant preparations already made for reporting to participants’ preferred SDR. This would also add to the likelihood of duplicating and fragmenting reported data, increasing opportunities for misreporting and misunderstanding the significance of this trading information. Thus, if passed, this proposed rule change creates additional burdens for both U.S. regulators and those overseas.
The proposed CME rule would require, as a condition for using CME clearing services, that all CME customers have their cleared trades directed to CME’s own captive SDR. This would undermine the intent of Dodd-Frank’s provisions on fair and open access, market protection, trading transparency, risk mitigation and anti-competitive practices.
“The Commission must reject proposed Rule 1001. At stake are the integrity of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s (“Dodd-Frank Act”) primary objectives of competition in the swap markets and ensuring that the execution, clearing, and reporting of swap trades are transparent and subject to robust and effective oversight,” explained the letter.
Background
Proposed Rule 1001 is the latest in a series of events initiated by CME to cause the Commission to unilaterally change rules and policies that had been relied on by market participants since they were finalized in 2011.
“[M]arket participants have chosen the SDR they want to use to meet their reporting obligations and, in many instances, that SDR is not CME’s SDR. In response, CME, in the 11th hour, pushed to change the CFTC’s rules to empower them to take control over trade reporting for trades they clear,” continued the letter.
CME filed a lawsuit against the CFTC on November 8, 2012. In the following weeks, the CFTC unilaterally and without public notice and comment withdrew language in a set of publicly available “Frequently Asked Questions on Reporting of Cleared Swaps” and reversed its own long-standing position and interpretation of the rule on tying derivatives clearing organizations (DCO) and SDR services. That same day, the CFTC approved CME’s provisional SDR registration and posted proposed Rule 1001 on its website for public comment. The very next day, CME dropped its lawsuit.
“The implications of Rule 1001 are far-reaching and certainly have not been carefully and properly considered in CME’s proposed rule filing,” said the letter.
The Depository Trust & Clearing Corporation (“DTCC”) provides critical infrastructure to serve all participants in the financial industry, including investors, commercial end-users, broker-dealers, banks, insurance carriers, and mutual funds. DTCC operates as a cooperative that is owned collectively by its users and governed by a diverse Board of Directors. DTCC’s governance structure includes 344 shareholders.
