Unpacking the SEC Reporting FAQ

Disclaimer: The Division of Trading and Markets of the Securities and Exchange Commission (“Commission”) has prepared the following responses to questions regarding regulatory reporting and public dissemination of security-based swap transactions under Regulation SBSR.  These statements represent the views of the staff of the Division of Trading and Markets.  They are not a rule, regulation, or statement of the Commission.  The Commission has neither approved nor disapproved the statements.  These statements, like all staff statements, have no legal force or effect: they do not alter or amend applicable law, and they create no new or additional obligations for any person.

It’s not unusual with Q&A/FAQ style additional guidance but that awkward balance for the reporting firms that they must really follow this guidance despite the fact it has no legal authority. It’s the regulatory equivalent of “I’m going to tell you what to do but I’ll deny this conversation if anyone asks!”

With that clarity sorted, let’s get started.

Q1:  Rule 901(j) of Regulation SBSR provides that the timeframe for reporting the information required under Rules 901(c) and 901(d) of Regulation SBSR is 24 hours after the time of execution of the security-based swap.  However, the Commission has issued a No-Action Statement with respect to Regulation SBSR providing generally that, if registered SDRs and their participants follow the CFTC’s swap reporting and public dissemination protocols and apply those protocols to security-based swap reporting, there will not be a basis for a Commission enforcement action with respect to certain provisions of Regulation SBSR that differ from the CFTC’s reporting and public dissemination rules (Parts 45 and 43, respectively).[1]  May a person who has a duty to report a transaction avail itself of both the 24-hour reporting deadline provided in Rule 901(j) as well as the No-Action Statement?

A1:  The Commission’s No-Action Statement regarding Regulation SBSR was premised on the idea that most security-based swap market participants are also participants in the swap markets, and have invested in systems and developed policies and procedures to satisfy the swap reporting requirements imposed by CFTC rules.  Furthermore, the Commission stated that it was “mindful of the time and costs that may be incurred by swap data repositories and swap market participants to implement aspects of the SBS reporting rules that have no analog in, or are not wholly consistent with, the swap reporting rules,”[2] particularly in view of the fact that the CFTC had proposed significant amendments to those rules and significant time and costs would be incurred to comply with those amendments.[3]  Under the CFTC rules, a swap transaction must be reported as soon as practicable after the time of execution.[4]  Under the CFTC’s approach, market participants are not permitted to “hold” a swap transaction or run a “timer” to delay reporting it.  The staff understands, however, that certain market participants are considering changing their systems to hold a transaction report of a security-based swap for up to 24 hours after execution before reporting it to a registered SDR, availing themselves of the No-Action Statement and reporting the security-based swap using the protocols developed for swap reporting but under the timeframe set forth in Regulation SBSR instead of the timeframe prescribed by CFTC rules and referenced in the No-Action Statement.  In the staff’s view, such practice would be inconsistent with the No-Action Statement.  Accordingly, if the staff discovers after 8 November 2021 that market participants are taking this approach, the staff will consider recommending remedial action to the Commission, up to and including that the Commission revise or even withdraw the No-Action Statement.

SEC rules say the swap should be reported within 24 hours of execution.

CFTC rules say the swap must be reported as soon as possible. (The current rules anyway as this changes with the upcoming CFTC ReWrite).

SEC No Action Statement says follow the CFTC rules (for the most part).

The question is whether a reporting firm takes best of both and reports within 24 hours rather than immediately as per CFTC rules?

The answer is a hard no. Although the threat to withdraw the No Action Statement is curious for two reasons. Firstly, it would give the firms the 24 hours they are asking for. Secondly, the SEC would need to issue more rules themselves and the whole point of the No Action Statement was to align with current CFTC reporting rather than issuing different rules.

Q2:  Rule 901(e)(1)(ii) of Regulation SBSR requires a registered clearing agency to report whether or not it has accepted a security-based swap for clearing.  Rule 901(e)(2) requires all reports of life cycle events (including the termination of an alpha transaction by a registered clearing agency) to include the transaction ID of the original transaction.  Rule 901(a)(3) requires the reporting side for the alpha transaction also to provide the registered clearing agency with the transaction ID of the alpha and the identity of the registered SDR to which the alpha has been reported.  If the reporting side of an alpha fails to provide the transaction ID and the SDR identity to the registered clearing agency, would the registered clearing agency be in violation of Rule 901(e)(1)(ii) for failing to report whether or not it has accepted the alpha for clearing?

A2:  Rule 906(c) requires various registered entities that have duties under Regulation SBSR, including registered clearing agencies, to establish, maintain, and enforce written policies and procedures that are reasonably designed to ensure that they carry out those duties.  For a registered entity that is also a self-regulatory organization (“SRO”), such policies and procedures generally are submitted to the Commission as proposed rules under Rule 19b-4.  One of the duties of a registered clearing agency is to report to the SDR that received an alpha transaction whether or not the clearing agency has accepted the alpha for clearing.  The clearing agency is reliant on its clearing member to provide the transaction ID of the alpha and the SDR identity.  Therefore, the clearing agency should adopt rules reasonably designed to ensure that its members provide the transaction ID and the SDR identity for each alpha.  It could occur that a member fails to carry out its duties under such a rule.  Nevertheless, a registered clearing agency is an SRO under the Exchange Act and, as such, is required (absent reasonable justification or excuse) to enforce compliance by its members with the duties stipulated in its own rules.

A clearing agency (DCO) has an obligation to report the lifecycle events including the termination of the alpha trade when accepting the alpha for clearing. This includes the obligation to include the transaction ID of the alpha and the identity of the SDR where the alpha was reported.

If the reporting party of the alpha fails to provide the DCO with the original ID and SDR details then would the DCO be in breach for failing to report this info?

The SEC confirms the DCO would be in breach because as a self-regulatory organization (SRO) the DCO has the ability to enforce compliance with its rules and should ensure the reporting party of the alpha provides this information.

Q3:  Do “retail” security-based swaps have to be reported to a registered SDR?

A3:  Yes.  In recent years, the Commission has settled enforcement actions against certain platforms because the products they offered to retail investors were security-based swaps, and these platforms were charged with failing to follow the Commission’s rules regarding security-based swaps.  Platforms that offer retail security-based swaps must be cognizant of all applicable Title VII requirements, including the trade reporting requirements under Regulation SBSR.  Beginning on 8 November 2021, all new security-based swaps must be reported to a registered SDR, even those that are developed and sold as part of a “retail” program.  In addition, Rule 901(i) of Regulation SBSR imposes a duty to report all historical security-based swaps (which term includes any security-based swap executed after the date of enactment of the Dodd-Frank Act, which was 21 July 2010).

Is there an obligation to report retail security-based swaps under SBSR?

Yes. Next!

Q4:  A security-based swap is executed on 7 November 2021 (i.e., before Compliance Date 1).  The parties effect a life cycle event to this transaction on 8 November 2021.  Does the life cycle event need to be reported before Compliance Date 3 for the reporting of historical security-based swaps (i.e., 14 April 2022)?

A4:  Historical security-based swaps must be reported by Compliance Date 3, not on Compliance Date 3.  A registered SDR may offer the functionality to its participants to begin reporting historical security-based swaps before Compliance Date 3.  If the reporting side to the security-based swap in the example elects to report the security-based swap before Compliance Date 3, the duty to report life cycle events is triggered by the reporting of the historical security-based swap.  If the reporting side elects not to report the security-based swap until Compliance Date 3, the duty to report life cycle events associated with that security-based swap will not trigger until after Compliance Date 3.

This is perhaps the best one.

New SBS trades must be reported from 8 November 2021 onwards.

Open ‘historical active’ SBS trades (executed before 8 November) must be reported on or before 14 April 2022.

If there is a lifecycle event (LCE) on an open historical SBS after 8 November then is there an obligation to report that immediately or before 14 April 2022?

The SEC guidance is that the reporting firms can choose what works best but there is no obligation to report the LCE until such a time as the open historical SBS is reported. Reporting the SBS triggers the obligation to then report the LCE.

This is pragmatic, useful guidance as it makes the obligations nice and clear. It also ensures the reporting party submits the reports in chronological order starting with the SBS execution and then reporting any subsequent events.

As a practical matter, firms might find it easier to get the backloading of open historical trades done earlier than the April deadline because then any subsequent LCE can be reported in the BAU normal reporting flow rather than held back to be reported later. Firms that have confidence in the quality of their data and reporting systems might choose to report the historical SBS population on or before 8 November compliance date.

Q5:  Firm A and Firm B entered into a security-based swap in June 2014.  Firm A registers with the Commission as a security-based swap dealer in October 2021; Firm B is not required to register and does not register as a security-based swap dealer.  Who has the duty to report the June 2014 security-based swap?

A5:  Firm A, because it is a security-based swap dealer.

This needs no unpacking.

Q6:  Firm A and Firm B entered into a security-based swap in June 2014.  Both Firm A and Firm B register with the Commission as security-based swap dealers.  In June 2014, when the transaction was negotiated, neither firm knew whether it would register as a security-based swap dealer and neither side made any arrangement for which side would incur the duty to report by the required date for historical security-based swaps.  The firms believe that it would be difficult presently to select which side will be the reporting party for the June 2014 security-based swap and other historical security-based swaps between them.  May each firm simply report all of the historical security-based swaps to which it is a party, even if that results in double-reporting (i.e. the same transaction is reported by both Firm A and Firm B)?

A6:  No.  The firms must select which side will be the reporting side, and only the reporting side may report the trade.

This is also an interesting one.

For historical open and expired trades where both parties are security-based swap dealers (or otherwise equal in the reporting party determination hierarchy such as major security-based swap participants) then do they need to go to the effort of determining which firm is the reporting party for each trade?

Unsurprisingly the SEC answer is of course you do, the rules apply and you must determine which firm reports which SBS trades in order to then report correctly.

There can be significant challenges in collating all the data to ensure accurate reporting of historic trades where systems may have changed or even been replaced in many firms. My strong advice is that firms that don’t have a clear understanding of whether they are the reporting party for the historical trade population should prioritise this exercise and ensure they determine this as soon as possible.

Q7:  Firm A and Firm B are both non-U.S. persons and both have affiliated U.S. personnel.  On June 1, 2017, they executed a security-based swap.  However, in anticipation of Compliance Date 3, neither side is sure whether its personnel were involved in arranging, negotiating, or executing that particular security-based swap.  Does the transaction have to be reported at all?  If so, which side is the reporting side?

A7:  Both sides must examine their records to ascertain whether any of their U.S. personnel were involved in arranging, negotiating, or executing the transaction.  If one side (assume Firm A) can confirm that its personnel were not involved in arranging, negotiating, or executing the transaction—or that it has no records available that can answer that question—that side has no duty under Regulation SBSR with respect to that transaction.  If one side (assume Firm B) does confirm that its personnel were involved in arranging, negotiating, or executing the transaction, that side should consult the other side (Firm A).  If Firm A reports that its personnel did not arrange, negotiate, or execute the transaction, or that records that can answer that inquiry are not available, then Firm B is the reporting side.  If Firm A and Firm B both utilized U.S. personnel to arrange, negotiate, or execute the transaction, they must select which will be the reporting side.

This follows on from question 6 and takes it to another level of pain.

For historical open and expired trades where both parties are non-US persons but are potentially on the hook with a reporting obligation due to the ANE (Arranged, Negotiated or Executed) rules. Do the firms need to go to the effort of determining if either is the reporting party for these swaps?

Again it’s no surprise that the SEC guidance is yes, crack on.

The process of checking records to see if any staff were involved in any ANE activities sounds daunting. I’m also a little surprised at the SEC including the following wiggle room statement: “it has no records available that can answer that question.”

Q8:  A non-U.S. person who is guaranteed by a U.S. person that is a security-based swap dealer executes a security-based swap with a person who is relying on the exception to the de minimis counting requirements for transactions that are arranged, negotiated, or executed by U.S. personnel (i.e., is a “relying entity”) and the relying entity is in fact using U.S. personnel to arrange, negotiate, or execute the particular transaction.  Who is the reporting side?

A8:  The relying entity would be the reporting side.  As discussed under the first numbered item in the Commission’s No-Action Statement regarding Regulation SBSR,[5] the Commission will not have a basis for an enforcement action if a person with a duty to report a transaction under Rule 901(a) of Regulation SBSR would not have the duty to report in a comparable scenario under the CFTC’s rules in force at the time.  The staff understands that the CFTC’s swap reporting rules do not take into account, when assigning the duty to report a swap transaction, whether a counterparty is guaranteed or the registration status of the guarantor.[6]  Therefore, the non-U.S. person (although guaranteed by a U.S. person) has no duty to report the security-based swap, and the duty falls to the relying entity.[7]

A technical question around where the reporting obligation sits in different non-U.S. person scenarios. I’m not sure that I can explain it any more clearly than the SEC did so not much to add here.

Q9:  I am aware of the Commission’s No-Action Statement, which expresses the Commission’s general approach that, if market participants follow CFTC reporting protocols for the pendency of the Statement, the Commission would not bring an enforcement action for not complying with SEC-specific rules enumerated in the Statement.  In certain matters, the CFTC rule in Part 43 or Part 45 is not clear, but the rule has been clarified by interpretive guidance issued by the CFTC staff.  If I follow the CFTC staff’s interpretive guidance, will I be viewed by the Commission staff as adhering to the CFTC reporting protocols?

A9:  Yes. 

Does the SEC No Action Statement approach of following the CFTC reporting rules also infer following the CFTC’s additional interpretive guidance?

The SEC confirmation that it does mean that firms should follow the additional CFTC guidance makes sense. It reminds me of the post-Brexit instruction from the UK’s FCA for reporting firms to continue to follow ESMA’s level 3 guidance for EMIR and SFTR. In the UK the Treasury onshored the EMIR and SFTR legislation into UK law but the additional ESMA guidance which has no legal basis in EU law either was not officially adopted. The FCA however advised firms to keep following this guidance where it was practical to do so.