SEC Swap Reporting – SBSR, The long journey

November 2021 sees a landmark milestone marking the fulfilment of a decade long journey towards SEC Security-Based Swap Reporting (SBSR). If we track the origins of the story further back to the 2007/8 financial crisis, then the distance travelled to reach this implementation is pretty epic.

SBSR and the reporting of Security-Based Swaps (SBS) is the SEC’s slice of the Dodd-Frank reporting requirements introduced after the US and the other G20 governments and regulatory bodies agreed to mandatory reporting of all OTC derivatives transactions.

The 2010 Dodd-Frank Act empowered the SEC to implement reporting of swap trades relating to so- called ‘single-name’ Security-Based Swaps i.e. an equity or credit derivative based on an underlying security that trades on a regulated exchange.

SEC or CFTC Swap Reporting? Single & mixers

The phrase ‘single-name’ is a bit misleading here as swaps relating to more than one underlying security are also reportable under SBSR. The rule of thumb being that if the swap relates to an index compromising nine or less securities then it’s deemed a “Narrow-Based Security Index” and reportable to the SEC under SBSR. And if it relates to ten or more securities then it’s reportable to the CFTC instead.

And if that wasn’t already confusing enough there are also ‘mixed swaps’ that are reportable to both the SEC and the CFTC. These are swaps that generally meet the criteria to be considered Security-Based Swaps but also have one or more elements that derive their value from interest rates, currencies or commodities (i.e. asset classes not in scope for SEC reporting). For mixed swaps the two Commissions are jointly mandated to prescribe the regulations.

And just in case ALL of that wasn’t confusing enough for you to be reaching for the aspirin, there are also rules governing what happens when an index migrates from being considered a narrow-based security index to becoming a broad-based security index. Or of course if they should migrate in the other direction from broad to narrow to complete the hakuna matata circle of life. Well life of an index rather than say an animated lion.

SEC Part 43 – Faster than Sonic the Hedgehog

The SEC has mandated that reporting firms need to report ‘real-time’ pricing data almost immediately upon execution. The actual data that gets publicly disseminated is heavily anonymised but through showing the pricing trends for the various swap instruments provides price transparency to ensure a level playing field.

The rules for the real-time prices reporting are often referred to as ‘Part 43 reporting’. Only a small number of fields are required to be sent for a Part 43 submission but the rules state that these submissions must be sent “as soon as practicably possible”. This chop-chop, pronto requirement for real-time reporting can be quite onerous on the firms as in many cases the expectation is that the report will be compiled, verified and submitted within seconds of the trade being executed.

The SEC has also prescribed Part 45 reporting which entails the firms submitting the full details of the swap data such as the parties, the economic terms and various other details of the transaction. Firms have until T+1 to submit these details which unlike the real-time reports are available only to the regulators and not made public.

Seeing the value

SBSR verges off into a different direction from the CFTC Part 45 reporting though as the SEC has not required the firms to report valuation data. Swap data reporting under the CFTC rules requires the firms to submit a daily valuation that specifies what the reporting firm (or clearing house for cleared swaps) calculates as the current value of each open trade position. The SEC has raised eyebrows by not requesting the same and instead stipulating that firms must submit “the data elements necessary for a person to determine the market value of the transaction”.

Critics of this approach argue for a reporting regime that is predominantly focused on systemic risk it’s a mistake not to compel the firms to report their internal valuations. Valuation Reporting would allow the SEC to assess whether any firms are being overly optimistic on the value of their traded positions and are hence taking on too much risk.

SEC Swap transaction (Part 45) reporting commences on 8 November. And SEC real-time (Part 43) reporting commences on 14 February 2022. Price transparency for single-name Security-Based Swaps. Just what your sweetheart was hoping for on Valentine’s. But nonetheless the fruition of a very long process and a huge amount of effort contributed by the reporting firms, the trade associations, the swap data repositories and of course the SEC itself.

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