The Commodity Futures Trading Commission on April 25 approved a proposed rule to improve the quality of swap data and update and streamline regulations related to swap data repository (SDR) operations and governance.
A critical component of the 2008 financial crisis was the inability of regulators to assess and quantify the counterparty credit risk of large banks and swaps dealers. To address this shortcoming, the Dodd-Frank Act gave the CFTC broad responsibility to enhance regulatory transparency and price discovery for market participants through trade reporting to SDRs.
In 2017, CFTC staff began the process of assessing the effectiveness of the swap reporting rules in Parts 43, 45, and 49 of the CFTC’s regulations. The proposed rule is the first that is part of the ”Roadmap to Achieve High Quality Swaps Data,” a comprehensive review of swap reporting regulations that the CFTC’s Division of Market Oversight announced in July 2017. “The CFTC received a wide range of feedback on the Roadmap, via written comments and discussions with SDRs and market participants,” said CFTC Chairman J. Christopher Giancarlo.
“I am pleased to see the first part of the Roadmap issued today,” Giancarlo said. “Completion of these proposed changes and the other changes described in the Roadmap will result in more complete, more accurate, and higher-quality data available to the CFTC and to the public; streamline data reporting; and help the CFTC perform its regulatory responsibilities.”
The proposed rule would:
- Update requirements for SDRs to verify swap data with reporting counterparties;
- Update requirements to correct swap data errors and omissions for SDRs, reporting counterparties, and other market participants; and
- Update and clarify SDR operational requirements to ensure data is available to the CFTC and the public as required by the Commodity Exchange Act.
Additionally, the CFTC proposes to update SDR governance regulations in order to streamline the requirements for SDRs.
In a statement in response to the proposed rule, CFTC Commissioner Rostin Behnam called attention to a section of the proposal that he said deviates from the plain language of Section 21 regarding the chief compliance officer role at an SDR.
Section 21(e)(2)(C) affirmatively requires an SDR’s CCO, in consultation with the board of directors or similar body, to “resolve any conflicts of interest that may arise.” The Commission’s current Part 49 rules mirror the language exactly. “However, today’s proposal would amend 49.22(d)(2) in a way that deviates from the plain language of the statute,” Behnam said. “While the statute requires that CCOs actually resolve any conflicts of interest, today’s proposal would simply require a CCO to take ‘reasonable steps’ to resolve any conflict of interest.”
“In addition, the proposal would only apply to ‘material’ conflicts of interest,” Behnam added. “Neither this new reasonableness standard nor this new materiality standard appears in the language of the statute.”
Behnam said his concern is that adding these new standards may “deviate from Congressional intent. This potentially dilutes the CCO’s obligation to address conflicts of interest, but perhaps more importantly, it dilutes the CCO’s ability to do so.”
Under the language of the Act and the current regulation, a CCO can point to their statutory obligation in working to resolve conflicts of interest. “Imposing a new reasonableness standard may have the real-world impact of making it more difficult for a CCO to actually resolve conflicts of interest,” he said.
The same statutory language appears elsewhere in the Act regarding CCO resolution of conflicts of interest at other types of Commission registrants, and the Commission has issued a final rule implementing the same new reasonableness and materiality standards regarding CCOs of futures commission merchants, swap dealers, and major swap participants. The Commission also has recently proposed adding these new standards for CCOs of swap execution facilities.
In contrast, however, the Commission is issuing amendments to the Part 39 regulations for derivatives clearing organizations (DCOs). Current Regulation 39.10(c)(2)(ii) requires a DCO’s CCO to resolve conflicts of interest. Regulation 39.10(c)(2)(ii) exactly follows the language of Section 5b(i)(2)(C).
“While the Part 39 Proposal makes amendments to 39.10, the Commission does not alter the CCO’s current duty to resolve conflicts of interest,” Behnam said. “In other words, for DCOs the Commission is choosing to maintain the statutory language. I believe that this may be the more appropriate approach for CCOs generally.”
Behnam further criticized the CFTC for beginning a practice of “re-interpreting statutory provisions with a somewhat flippant regard for their underlying purpose and rationales in order to lessen the burdens that are rarely substantiated by anything more than a call for change. While it is not out of the ordinary for an independent agency to reexamine whether its regulatory approach remains fit for purpose, I believe that we should be mindful that our role is not to bend too easily to unsupported claims of burden or complexity. This is particularly true when the re-interpretation seems to be at odds with the express language of the statute itself.”
Commissioner Dawn Stump expressed concerns of her own. “I question certain of the underlying assumptions driving these policy changes, and the promulgation of this rulemaking in isolation and without corresponding changes to other swap data reporting rules,” Stump said in a statement.
“I am uncomfortable with the lack of details and nebulous description of certain obligations in many parts of the Proposal, which I believe will make it difficult for the public to comment in an informed fashion,” Stump added, “and I disagree with imposing immense additional burdens on SDRs and all types of reporting counterparties, particularly without commensurate streamlining of regulatory obligations in the rest of the Commission’s swap data reporting rule set.”
The CFTC is seeking comments on the proposal. Behnam said he is “particularly interested to learn whether various stakeholders believe that the statute itself is diluted by the addition of the reasonableness and materiality standards to CCO obligations in this and other rulemakings.”
The comment period ends 75 days after the proposal’s publication in the Federal Register. All comments will be posted on the CFTC’s Website.