The Commodity Futures Trading Commission (“CFTC” or “Commission”) today proposed amendments to its rules relating to swap data reporting in connection with cleared swaps (the “Proposal”). Comments on the proposal must be submitted to the CFTC 60 days after the Proposal is published in the Federal Register. As of the date of this post, such publication has not taken place.
On January 13, 2012, the Commission published part 45 of the Commission’s regulations. Under Part 45, all swaps subject to the Commission’s jurisdiction (regardless of the counterparties) must be reported to a swap data repository (“SDR”). Part 45 establishes the manner and contents of such reports, and requires reporting both when a swap is initially executed, referred to as “creation data,” and over the course of the swap’s existence, referred to as “continuation data.”
On March 26, 2014, the Commission requested comment on a variety issues that have complicated the swap data reporting and recordkeeping process, one of which related to the manner in which the swap data reporting rules should address cleared swaps. Under the current Part 45 framework, swap data reporting is premised upon the existence of one continuous swap for reporting and data representation purposes. This has caused certain complications, however, in the context of reporting cleared swaps.
In particular, CFTC Regulation 39.12(b)(6) provides that upon acceptance of a swap by a derivatives clearing organization (“DCO”) for clearing, the original swap is extinguished and replaced by equal and opposite swaps, with the DCO as the counterparty to each such swap. The original swap that is extinguished upon acceptance for clearing is commonly referred to as the “alpha” swap, and the equal and opposite swaps that replace the original swap are commonly referred to as “beta” and “gamma” swaps. Together, these swaps make up a typical cleared swap transaction. The data associated with the alpha, beta and gamma swaps is not always reported to the same SDR, however, nor are all of these swaps necessarily linked together by references to each other in the reported data. Moreover, there is some ambiguity under the current Part 45 as to who is required to report which swap, and who is permitted to choose the SDR for such swaps.
In general, the Proposal would provide that each component of a cleared swap transaction must be reported as distinct swaps for purposes of Part 45 reporting. The Commission states that the objective of the Proposal is to provide clarity to swap counterparties and registered entities of their Part 45 reporting obligations with respect to each swap involved in a cleared swap and to improve the efficiency of data collection and maintenance associated with the reporting of swaps involved in a cleared swap transaction.
Newly defined terms
The Proposal defines the terms “original swap” and “clearing swaps” for use throughout Part 45 in order to help clarify reporting obligations for each swap involved in a cleared swap transaction. An “original swap” is defined as a swap that has been accepted for clearing by a DCO. Swaps commonly known as alphas would fall within this definition. A swap executed on a swap execution facility (“SEF”), designated contract market (“DCM”) or off-facility would thus become an “original swap” for purposes of Part 45 by virtue of its acceptance for clearing by a DCO.
The Proposal defines a “clearing swap” as a swap created pursuant to the rules of a DCO that has a DCO as a counterparty, including any swap that replaces an original swap that was extinguished upon acceptance of such original swap by the DCO for clearing. A “clearing swap” would thus encompass: (1) swaps to which the DCO is a counterparty and that replace an original swap (i.e., swaps commonly known as betas and gammas) and (2) all other swaps to which the DCO is a counterparty (even if such swap does not replace an original swap).
Creation data reporting and choice of SDR
The Proposal explicitly establishes the relevant DCO as the reporting counterparty for “clearing swaps” and require DCOs to report creation data for each “clearing swap” as soon as technologically practicable after acceptance of an “original swap” by a DCO for clearing (in the event that the “clearing swap” replaces an “original swap”) or as soon as technologically practicable after execution of the “clearing swap” (in the event that the “clearing swap” does not replace an “original swap”). The existing creation data reporting requirements for swaps other than “clearing swaps” would remain largely unchanged.
The Proposal provides that, for swaps executed on or pursuant to the rules of a SEF/DCM (including swaps that become “original swaps”), the SEF/DCM would have the obligation to choose the SDR to which creation data for that swap is reported. For all other swaps (including for off-facility swaps and “clearing swaps”), the reporting counterparty would have the obligation to choose the SDR.
The Proposal also removes the existing confirmation data reporting requirements for swaps that are intended to be cleared at the time of execution. SEFs/DCMs and reporting counterparties would continue to be required to report primary economic terms (“PET”) data as part of their creation data reporting, but would no longer be required to report confirmation data for swaps that are intended to be submitted to a DCO at the time of execution. Instead, the DCO would be required to report both PET and confirmation data for “clearing swaps” as part of its creation data reporting obligations.
Continuation data reporting
The Proposal requires a DCO to report all continuation data for “original swaps,” including terminations, to the SDR to which such “original swap” was reported, and requires such SDR to accept and record the termination. Such continuation data must include the following data fields: (i) the legal entity identifier (“LEI”) of the SDR to which each “clearing swap” that replaced a particular “original swap” was reported by the DCO; (ii) the unique swap identifier (“USI”) of the “original swap” that was replaced by the “clearing swaps”; and (iii) the USIs for each of the “clearing swaps” that replace the “original swap.” Together, the Commission believes, these fields will help data users link each component of a cleared swap transaction, even if the component parts are reported to different SDRs.
The Proposal also removes the existing requirement that a Swap Dealer/Major Swap Participant reporting counterparty report daily valuation data for cleared swaps. Instead, the DCO would be the only counterparty required to report continuation data, including valuations, for “clearing swaps.” Aside from this, the existing continuation data requirements for swaps that qualify as “clearing swaps” (and for uncleared swaps) would remain largely unchanged.
Reporting to a single SDR
The Proposal requires DCOs to report all data (creation and continuation) for a particular “clearing swap” to a single SDR, and to report all creation data for each “clearing swap” that replaces a particular “original swap” (i.e. for the beta and gamma that replace a particular alpha) to a single SDR. This would ensure that all creation data and all continuation data for all “clearing swaps” that can be traced back to the same “original swap” would be reported to the same SDR (although not necessarily the same SDR as the “original swap”).
USI creation and transmission
The Proposal requires a DCO to generate and assign a USI for each “clearing swap” upon, or as soon as technologically practicable after, acceptance of an “original swap” by the DCO for clearing (or execution of a “clearing swap” that does not replace an “original swap”), and prior to reporting the required swap creation data for each “clearing swap.” The DCO should transmit the USI for a “clearing swap” electronically to the SDR to which the DCO reports required swap creation data for the “clearing swap” as part of that report; and to the DCO’s counterparty with respect to that “clearing swap” as soon as technologically practicable after either acceptance of the “original swap” by the DCO for clearing or execution of a “clearing swap” that does not replace an “original swap.”
The Proposal also modifies certain existing PET data fields and explanatory notes in Appendix 1 to Part 45 and would add several new PET data fields to accommodate the proposed clarifications for the reporting of cleared swaps described above.