SEC Looking to Fit Final Piece of Swaps Data Puzzle

By Colby Jenkins, TABB Group

Originally published on TABB Forum

The first batch of Swap Data Repository reports, under the CFTC’s purview, was released to the public more than two years ago. For market participants eager to gain a similar look into security-based swaps, including single-name CDSs, under the SEC’s regime, it likely will be a year from now before we can add a new data repository to the U.S. list. But the SEC’s patient approach to rulemaking should pay off.

Publicly available, real-time disseminated trade data for the traditionally opaque over-the-counter fixed income markets is very much a new species within the capital markets animal kingdom. When Dodd-Frank was signed into law, the vast majority of OTC fixed income products were placed under the regulatory purview of the Commodity Futures Trading Commission (CFTC). The Securities and Exchange Commission (SEC) was given authority over a smaller subset of products – most important, single-name credit default swaps (SN-CDS). This responsibility was the lurking giant of Dodd-Frank Title VII (see Exhibit 1, below).

Exhibit 1: SEC/CFTC Swap Jurisdictions

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Source: TABB Group, CFTC, SEC

The aggregation and public dissemination of OTC derivatives trade data was one of the most significant and ambitious goals of the 2010 G-20 agreement, and 2016 is shaping up to be one of the most significant years of progress for U.S. regulatory regimes. Central to the progress is a major step forward taken recently by the CFTC toward refining the workflow of its own Swaps Data Repository (SDR) framework by requesting industry comment on how best to improve the process.The first batch of Swap Data Repository (SDR) reports (under CFTC purview) was released to the public more than two years ago. It was a fascinating first glimpse into an otherwise opaque OTC derivatives market. For market participants eager to gain a similar look into the last bastion of Dodd-Frank Title VII opacity – security-based swaps under the U.S. SEC’s regime (again, the most important of which are single-name CDSs) – the wait just got longer.

On the SEC side of the equation, however, progress has been less aggressive. On March 18, the SEC extended the registration deadline for entities looking to register as a Security-Based SDR, or SB-SDR – the SEC equivalent of the CFTC’s established SDR framework – until June 30, 2016. Looking still further out, the eventual rollout of implementation dates for reporting and public trade data dissemination will likely follow a staggered +6 and +9 months from the point at which the SB-SDR is “operationally ready.” The definitions of “operationally ready,” however, are murky, to say the least, and a handful of core definitions and outstanding cross-border agreement issues are yet to have rules finalized. With an optimistic outlook, it will likely be year from now before we can add a new data repository to the U.S. list.

In the global context, we are still in great shape comparatively. There are four U.S. SDRs currently in operation under the CFTC that are pending provisional registration: The DTCC (Interest Rate, Credit, Equity, FX and other Commodity asset classes), Bloomberg’s SDR (BSDR) (Interest Rate, Equity, Credit, FX, and other Commodity asset classes), Ice Trade Vault (Commodity asset classes and Credit), and CME SDR ( Interest Rate, Credit, FX and other Commodities). Meanwhile, the number of trade repositories in Europe (6) greatly outnumbers the resources available in other regions (see Exhibit 2, below) across all asset classes.

Exhibit 2: Trade Repositories Across Global Regulatory Regimes

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Source: TABB Group, FSB

The quick rate at which the trade repository framework in Europe developed certainly has come at a cost, however. Significant discrepancies between reporting standards from one TR to another in Europe, coupled with the inefficient double-sided reporting practices, have been detrimental to oversight progress within the European regime.

The SEC’s wait-and-see approach is evident in the framework for SB-SDRs laid out in the final published rules – taking many of the standards of the CFTC’s rules with deviations where the SEC has felt it could improve upon existing rules within the CFTC approach. The SEC has been wise to be patient.