11.26.2012
By Terry Flanagan

Industry Gears Up for Swap Data Reporting

As the derivatives industry gears up for mandatory reporting of swap transactions as required under the Dodd-Frank Act, regulators are taking note of the formidable data and infrastructure hurdles that need to be surmounted.

In particular, the U.S. Commodity Futures Trading Commission has extended the deadlines for swap dealers to begin reporting to designated swap data repositories (SDRs).

Gary Gensler, chairman, Commodity Futures Trading Commission

Gary Gensler, chairman, Commodity Futures Trading Commission

The Commission, headed by chairman Gary Gensler, will take no enforcement action against a swap dealer for failing to report swap transaction data until the swap dealer’s registration deadline, even if the dealer has already registered prior to the deadline.

The no-action relief expires on April 10, 2013, which is the date that all counterparties to swap transactions are required to be in compliance with the swap data reporting rules.

Under the CFTC rules, known as Part 43, all entities whose swap activities exceeded a notional threshold ($8 billion) in the month of October 2012, are required to register no later than Dec. 31, 2012, and will therefore be among the initial group of swap dealers required to comply with the swap data reporting rules.

In granting the no-action relief, the CFTC noted that market participants had expressed concern about the potential for differing compliance dates for swap dealer reporting in the event that one or more entities apply to register as swap dealers before Dec. 31.

The first such entity to apply to register as a swap dealer will also be the first—and potentially, for some period of time, the only—entity to have its swap transaction and pricing data publicly disseminated.

The public dissemination of data reported by one, or even a few, early registrants may facilitate the identification of parties to the swaps for which data has been reported, raising privacy issues.

In addition, market participants have designed their swap data reporting infrastructure on the understanding that all swap dealers would be required to begin reporting on the same day.

In order to accommodate differing compliance dates, costly last-minute modification to such infrastructure would be required to avoid reporting errors.

In the OTC derivatives market, collateral messaging and management is but one area where data workflows need to change or risk being overwhelmed.

“We expect the volume of messages about collateral requirements for bilateral trades to increase significantly, as a result of Dodd-Frank,” said Michele Carlo, managing director at MarkitSERV. “With our partner, AcadiaSoft, our portfolio reconciliation tools enable the buy side to effectively manage margin calls, reconcile their positions and even pull in independent valuations from Markit. Multifunctional solutions like this are critical for buy side firms to be efficient, both operationally and technologically.”

The CFTC also extended the compliance for reporting historical swaps (e.g., swaps entered into prior to October 2012) until 30 days after the entity’s swap dealer registration deadline. The no-action relief also expires on April 10, 2013.

The International Swaps and Derivatives Association has expressed concern that reporting obligations for historical swaps will become effective at the same time as reporting obligations under Part 43.

CME Group, meanwhile, has received approval for its CME Repository Service as an SDR for credit default swaps, interest rate swaps, commodities and foreign exchange asset classes. Market participants will be able to direct swap trades to the CME Repository by using existing CME interfaces and third-party connectivity points, thereby avoiding the additional cost associated with establishing connectivity to other SDRs.

“CME Repository Service is a natural extension of the clearing and processing services we offer to both sell- and buy-side clients, providing a compliant, efficient and low-cost way for market participants to access an SDR,” said Kim Taylor, president, CME Clearing and president, CME Repository Service, in a statement.

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