Since 2017 we have been hearing about the CFTC’s Project KISS, which means ‘Keep it simple, stupid’. The thinking behind the initiative is that complexity and quality are inversely related, so if you want high quality data, the complexity needs to be low.
With that in mind, the rules surrounding SDR reporting were well overdue a revisit. On 20 Feb, a little late for Valentine’s Day perhaps, parts 43, 45, 46 and 49 of the Dodd Frank Act got the kiss they were waiting for when Chairman Heath P. Tarbert announced the proposal of simplified reporting rules.
So, just how simplified are the proposed rules and what changes are reporting counterparties going to have to prepare for?
Well the big winners could be the smaller businesses. That is the non-swap dealers and non-major swap participants. Their reporting deadline could move to “T+2” and it’s been suggested that their requirement to report valuation data for open contracts every quarter should be removed. There’s harmonisation with EMIR here as small Non-Financial Counterparties do not need to report valuation data under this regime.
There’s no such luck for the bigger reporting entities though as their requirements are actually increasing. Also in line with EMIR, the CFTC is proposing that collateral margins are reported too. This is clearly data that the regulators feel is important to monitor systemic risk. In 2012 when part 45 initially went live margin data was believed to be too complicated to collect due to the fact that it is mostly dealt with on a portfolio basis.
The new reporting rules could also mandate LEIs for both reporting entities and their counterparties.
This sounds familiar doesn’t it? We’ve seen several regulatory regimes do this already and the question about who is responsible for ensuring your counterparty has an LEI always crops up. The answer is usually the same, third party registration of an LEI is easy so there is no real excuse for identifying your counterparty without an LEI.
It’s also being suggested that voluntary reporting is binned. The CFTC has been inundated with garbage data received under the premise of voluntary reports. The CFTC is now looking for quality over quantity and reporting firms will need to ensure they are not over-reporting.
Other proposed changes – goodbye USIs, hello UTIs, reportable fields
USIs are set to become a thing of the past with the new proposals as the more generic UTI takes over.
The CFTC also recommends that where a trade is reportable to multiple jurisdictions that the same UTI should be used for global reporting.
The proposed rules also provide a finite list of 116 reportable fields in part 45 and 90 in part 43. This is probably the most welcome change to the new rules as firms have been struggling to truly know what trade data regulators really want. Heath P. Tarbert even said in his statement, ‘We have essentially asked [participants] to decide what to report to the CFTC, instead of being clear about what we want.’
Improved data quality?
If all these changes are implemented the CFTC certainly will begin to receive data of a much higher calibre than they do today. However, simplifying the rules is still changing the rules and change is always a tricky task to co-ordinate. Firms will need to plan carefully to make sure they meet new requirements correctly and above all – test their data!
Hint: Kaizen can help with this
The comment period for the proposed rules ends in May 2020 with the likelihood being that reporting under them will commence towards the tail end of 2020. The DTCC re-architecture of its US repository is tactically planned to align itself with the kissed Dodd Frank rules.