CFTC need not walk the talk on swap data harmonisation

Christopher Giancarlo is a man of strong convictions. One of his strongest as a regulator is his belief in cross-border coordination.

“Regulators must take a cooperative and global approach to pursuing market integrity and customer protection,” the chairman of the US Commodity Futures Trading Commission (CFTC) said in a speech made in Estonia in September. “We must keep in mind that competition, growth and innovation are stifled if we impose piecemeal, or inconsistent, regulatory requirements.”

Whether the CFTC can put those words into practice remains to be seen. The agency is currently conducting a review of its swap data reporting rules, which aims to align US swap data definitions with those of foreign regulators.

There is no question that something needs to be done about swap data reporting. As Risk.net reported in July, around 28% of commodity trade reports submitted to US swap data repositories (SDRs) since reporting began in 2013 were missing key information, such as the underlying commodity asset or the instrument traded. The situation is no better in Europe, where trade repositories have struggled to match key information.

If the US and Europe are unable to deliver accurate swap data reporting even at the domestic level, how realistic is the goal of global harmonisation? National regulators cannot make sense of the information that is currently reported to domestic SDRs, and incorporating data from multiple regions would only seem to complicate the matter, not simplify it.

The effort to harmonise the definitions for critical swap data elements is being led by a working group convened by the Committee on Payments and Market Infrastructures (CPMI) and the International Organisation of Securities Commissions (Iosco), known as the CPMI-Iosco harmonisation group.

The group’s technical guidance will be released in early 2018, addressing more than 100 critical data elements currently represented in various ways in different jurisdictions. Dan Bucsa, deputy director of the division of market oversight at the CFTC and co-chair of the CPMI-Iosco harmonisation group, says a global framework for swap data reporting will allow regulators to make better use of this information. “It’s not aggregation just for the sake of aggregation. It is to look at risk, market size and market activity,” he says. “The regulatory community believes they need certain fields to achieve those use cases.”

The CPMI-Iosco guidance won’t be mandated and national regulators will be free to choose data elements they require in their own jurisdictions. The CFTC reiterated this point in its review, stating that it will “seek to match foreign regulators as closely as possible, although some elements may be different depending on [the] commission’s needs”.

Some market participants have already raised concerns about the harmonisation effort. The International Swaps and Derivatives Association and Securities Industry and Financial Markets Association filed a joint comment letter supporting the commission’s SDR review, but recommending the CFTC not require all data fields suggested by the CPMI-Iosco harmonisation group, as they believe some will not increase data quality (they declined to specify which ones).

The Commercial Energy Working Group also filed a letter stating it “generally supports” the regulator’s efforts to harmonise, but doesn’t believe synchronising with foreign regulatory requirements should lead to requiring additional data fields.

Even if the harmonisation process doesn’t lead to more data fields, it could still require firms to adjust reporting systems to meet new international definitions for swap reporting

Even if the harmonisation process doesn’t lead to more data fields, it could still require firms to adjust reporting systems to meet new international definitions for swap reporting, which would be a big cost to the industry, says a former CFTC special counsel who had a hand in crafting the agency reporting rules.

“If it’s a matter of just taking some data that you are already getting and putting it in another form, that’s going to require everybody to make that change,” the lawyer says. “From a cost-benefit perspective, is that something that is necessary?”

It is easy to see why the CFTC and other regulators would want an all-encompassing view of the global swaps market and the amount of risk its participants are taking, as so many of them deal in multiple jurisdictions.

And with the European Commission also recently suggesting amendments to the European Market Infrastructure Regulation (Emir) in an effort to improve swap data quality, some might consider it the perfect time to have the US and Europe revamp their swap data fields in a coordinated manner.

Perhaps a more prudent course would be to take steps to improve swap data quality at the domestic level before pushing for international harmonisation. It’s clear that Giancarlo wants to walk the talk on harmonisation. But you’ve got to crawl before you can walk, and when it comes to swap data quality, the CFTC is at a standstill.