After months of working from home, turning our dining rooms into study halls and our guest rooms into ersatz “C-Suites,” the flaws and shortcomings of our homes as make-shift office spaces were in our constant line of sight, if not our colleagues’ on video calls.
As a result – or just because many had more time on their hands – over the past six months, the home improvement industry has been booming. Days on end and up close in a space allows one to see the details, flaws and all.
So it seems appropriate, as the Commodity Futures Trading Commission (CFTC) works to finalize new swaps data rules this week, to share some observations from up-close and lengthy swaps reporting oversight work. This year marked the end of an appointment as Monitor that I undertook in October 2016 for the U.S. District Court for the Southern District of New York regarding a swaps reporting case that the CFTC brought against one of the largest swaps dealers in the world. The parties have settled that case.
The task for the Monitor was to test, analyze, and provide recommendations for the dealer’s swap data-reporting infrastructure, processes, and policies, including its supervisory systems. We also tracked and tested remediation efforts.
Putting aside any specific deficiencies in that case and looking at the bigger picture – with the benefit of having spent years with the relevant data and engaging in a myriad of meetings and interviews – it is clear that there are industry-wide swaps reporting flaws that can and should be addressed.
The CFTC’s proposed rules matter for the broader economy since swaps reporting real-time data is used for price discovery that helps determine the price of everything from corn to oil to orange juice.
The agency has been trying since 2017 to update swaps reporting requirements. The original rules, promulgated in 2012, were very complex and all swaps dealers had problems with getting the data gathering and submission correct. The resulting sea of data collected by the CFTC had inherent consistency issues, posing data integrity challenges. The proposed rules that the CFTC will consider on September 17 should significantly move the swaps reporting regime toward the agency’s stated goal of updating and rationalizing the data required to be reported and harmonizing with the operational side of data collection – the swaps data repositories (SDRs). Separate from the regulator, SDRs serve as intermediaries in collecting real-time swaps reporting data and then transmitting it to the CFTC.
This is a complex process. Imagine your own annual tax-return filing process. Forms and fields to be entered; information and receipts to be submitted. Now, imagine having to file your taxes regularly one way with the IRS, while also having to provide real-time data about your income and earnings to another entity, but in some instances with different requirements, forms and inputs.
That’s a simplified explanation of what swaps dealers now face in attempting to comply with swaps reporting rules. The CFTC and SDRs maintain different swap dealer reporting requirements, and non-compliance with CFTC requirements could result in an enforcement action. However, a swap dealer must report swap information to an SDR in order for the data to be sent to the CFTC. When the data do not match or other errors appear, trouble awaits.
During the course of the Monitor work, we found that it is possible for a firm to submit incomplete CFTC required data to an SDR and for the SDR to accept those messages even if fields are missing certain required information. We also found instances in which an SDR may not have an exact CFTC required field, making it challenging for a swap dealer to report a particular field that both entities can accept. The large number of reporting fields (more than 100) and lack of standardized data terms create data integrity issues and pose challenges for the SDRs and CFTC to review and analyze the data. In addition, U.S. swaps data reporting requirements also differ from those in Europe and Asia.
Promoting transparency in the swaps market is no small or easy task. The CFTC can streamline the process for firms – and its own data analysis – by identifying a smaller set of required reporting fields, including standardized data terms across all asset classes. To take a step toward international harmonization, the agency could expand swaps reporting time requirements to 24 hours, which would allow for data to be reported more completely and correctly.
Unfortunately, the Dodd-Frank Act enacted in the wake of the 2008 financial crisis endeavored to enhance swaps market transparency by mandating trade reporting before first understanding what data fields regulators would consider important and exactly how the process would work. Just as many of us put in the time and are now enjoying the benefits of our home improvement efforts, we will all benefit from the CFTC’s cleaning up its rule book.