SDRs want to put onus on counterparties to check swap data

CME, Ice and DTCC oppose duty to reach out to non-reporting party for data verification

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As with tango, it takes two to compile US swap data: a swap data repository on the one hand and one of the counterparties to the trade on the other. But who should lead when it comes to checking the accuracy of the data? SDRs are clear it should not be them.

Current rules, under review by the Commodity Futures Trading Commission (CFTC), require only one counterparty – often a swap dealer – to submit the details of a swap transaction to an SDR, and the SDR must then in most cases confirm those details with both counterparties. The problem is the non-reporting entity – for example, a corporate hedger – is under no obligation to verify the data, placing the burden of obtaining the confirmation on the SDR

“While the SDRs are agnostic as to which participants should be responsible for confirmation of data accuracy and completeness, the responsibility should not live with the SDRs,” the CME and Ice SDRs wrote in a joint comment letter to the CFTC. The CFTC should define clearly what steps counterparties must take to verify the reported data and in what time frame, they added.

In its comment letter, the Depository Trust & Clearing Corporation (DTCC) said responsibility sits with the reporting entity, and an SDR should be deemed compliant with the verification obligation if the data has come from a counterparty that has an independent duty to keep the information accurate – as swap dealers do – and if the SDR has procedures in place to give the non-reporting side “an opportunity” to sign up with it and review the data. 

The need to review the swap data rules has become all too evident. The data, particularly on commodity swaps, has been riddled with errors and inconsistencies from the start. As reported by, 28% of commodity trade reports submitted to US SDRs between January 2013 and July this year are missing key information. In almost half of those cases, the reports fail to indicate whether the instrument traded was a swap, forward, option or exotic. The rest were marked as swaps, but the underlying commodity asset was not specified.

While the SDRs are agnostic as to which participants should be responsible for confirmation of data accuracy and completeness, the responsibility should not live with the SDRs

CME and Ice, in a joint comment letter

If the CFTC imposes a verification duty on non-reporting counterparties, they should also be required to on-board with the relevant SDR so they can follow the repository’s procedures for confirming the data, according to CME and Ice. “The SDR should have no responsibility to reach out to the non-reporting party,” they wrote.

Without a relationship in place, as the DTCC pointed out, it is “logistically difficult and overly burdensome, if not impossible” for the SDR to contact the non-reporting party and confirm the details. “An SDR has no ‘stick’ to enforce compliance with such outreach,” the DTCC added.

However, if the onus to validate the details of transactions does switch to the counterparties, the non-reporting party might find itself in a bind.

Commercial end-users in particular don’t have the reporting systems to confirm each swap data element, says Phil Lookadoo, partner at law firm Haynes and Boone, echoing the comment letter he co-authored for the International Energy Credit Association. And the small volume of transactions an end-user might participate in makes it difficult to justify the cost of implementing such a system, he says. In extreme cases, having to implement such a system could push them into futures markets.

“The cost per swap goes up and people start making choices. Am I really going to hedge my risk using swaps, or is this going to be an expense that is prohibitive to me, so therefore I can’t use swaps anymore?” Lookadoo says. “That’s a cost of hedging their risk that may cause them to decide, ‘you know, we’re just not going to do it.’”

Am I really going to hedge my risk using swaps, or is this going to be an expense that is prohibitive to me, so therefore I can’t use swaps anymore?

Phil Lookadoo, Haynes and Boone

A former CFTC special counsel, who had a hand in crafting the current rules, doesn’t agree firms would cease using swaps altogether purely because of a marginal increase in costs and verification procedures. But he does acknowledge it could have some impact on how firms operate in the swaps market: “I don’t see any value in putting a burden on a corporate that is not in the business of reporting swaps to have to report or verify information. It is a significant burden, and I think it would deter risk management activities to some extent.”

Complicating matters further, there is no standardisation of procedures or data fields between the SDRs. Those nuances mean verifying submitted data could be a daunting task for a firm with little to no reporting experience, says the former CFTC lawyer.

“They [end-users] have to train someone to learn those fields, understand how they are input in there and then understand the interface in the various repositories,” he says. “That is very costly, and there is certainly a likelihood that there may be confusion as to what is in there.”

Moreover, requiring commercial end-users with little experience of swap reporting to verify data could add to the burden that is already being felt by reporting counterparties, says a compliance expert at a US-based swap dealer.

“We would end up spending more time having to walk our customers through interpreting and understanding how to verify data,” he says. “A lot of end-users don’t necessarily have the expertise to go into the swap data repository and verify data.”

Despite the difficulties, dual verification may be a necessary measure – if a comparable reporting regime in Europe is anything to go by.  

Under the European Market Infrastructure Regulation (Emir), both counterparties report a swap transaction. However, each counterparty is required to verify only the data it has submitted, resulting in a regime with dual reporting but without the dual verification of the kind proposed by US SDRs.

Trade repositories have struggled to match corresponding trade reports, leading some to label the data “garbage”. In a bid to improve the data, the European Commission published a review of Emir on May 4, suggesting amendments to boost matching rates and reduce reporting burdens.    

“Due to the lack of reporting clarity and data standards, any time only one person is putting through what they believe the trade should be based on their trade-capture system and the other side is not confirming or agreeing with that, I think you have the possibility of having inaccurate data,” says Melissa Ratnala, chief operating officer of Ice’s SDR, Ice Trade Vault.

The CFTC won’t rush a decision on whether to go with dual or single verification, says Amir Zaidi, director of the regulator’s Division of Market Oversight. But verification is crucial, he says.

Somebody has to confirm the accuracy, so what is the best way to do that? That is really all we’re trying to find out

Amir Zaidi, CFTC

“We’re not trying to suggest one approach over the other at this stage. We’re really just trying to get feedback from participants as to the best way to confirm the accuracy of the data,” he says. “Somebody has to confirm the accuracy, so what is the best way to do that? That is really all we’re trying to find out.”

According to the proposed timeline in the review’s roadmap, the regulator will begin putting together proposed rules around SDR operations – including the question of verification – during the fourth quarter of 2017. But Zaidi says the review’s initially published timeline is meant to be more of a guide.

“These are anticipated time frames. We wanted to provide the industry with the complete picture of what we’re planning to do and how we are planning to sequence the steps, so they have the whole picture,” Zaidi says. “We have been criticised in the past for not providing a roadmap on the Dodd-Frank rulemakings, so we are trying to do that now.”

Regardless of when things do kick off, the former CFTC lawyer doesn’t believe the commission will support a regime in which non-reporting counterparties must verify data.

“I would be surprised if they push such a burden on corporates. That’s not typically how the CFTC operates,” he says. “Unless this was clearly necessary and going to help do all these things the CFTC can’t do its job without, why would it impose a burden like this?” 

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