If you have read my previous articles on Tabb Forum, you will know that I believe the all-important swaps reporting requirement has been badly mishandled by the regulators worldwide, missing a golden opportunity to shed some light on this otherwise opaque market. In the US, one of the nagging problems has been that the SEC hadn’t put out its reporting rules, so there was no required reporting on one of the riskiest areas of the market – single-name CDSs.
Recently the SEC took a major step in rectifying this, by issuing some proposed and final rules. So, how well did they do? Let’s take a look.
First Things First
Actually, the SEC issued three rules, two final and one proposed, which means that we will have to patch them together to get as complete a picture as we can. The final reporting rule is: Regulation SBSR-Reporting and Dissemination of Security-Based Swap Information. There is also a proposed rule with an identical name, indicating that it will be combined with the final reporting rule at some point. I will cover both of them in this article. The SDR rule, Security-Based Swap Data Repository Registration, Duties, and Core Principles, I will cover in a later article.
Including their preambles, these three rules comprise over 1,350 double-spaced pages. My practice has always been to go right to the rule text, since that is what everyone will be bound by, and then read any sections of the preambles that provide necessary clarifications. The rules themselves comprise 92 pages, a significantly more manageable reading assignment. I’ll cover only the unexpected or potentially troublesome aspects, but people should read all 92 pages.
In the SEC rulebook, the reporting rules are 242.900-242.909. Specifically:
242.901 Reporting obligations.
242.902 Public dissemination of transaction reports.
242.903 Coded information.
242.904 Operating hours of registered security-based swap data repositories.
242.905 Correction of errors in security-based swap information.
242.906 Other duties of participants.
242.907 Policies and procedures of registered security-based swap data repositories.
242.908 Cross-border matters.
242.909 Registration of security-based swap data repository as a securities information processor.
There are a few oddities among the definitions, each perhaps a warning about other oddities later on. One is “Trader ID means the [Unique Identification Code] UIC assigned to a natural person who executes one or more security-based swaps on behalf of a direct counterparty.” So that seems to be leading to a requirement to identify the person who executed the trade. Unless, of course, the trade was executed by a computer. Do we use HAL’s UIC then? There is also “Trading desk ID means the UIC assigned to the trading desk of a participant,” and “Trading desk means, with respect to a counterparty, the smallest discrete unit of organization of the participant that purchases or sells security-based swaps for the account of the participant or an affiliate thereof.” So will we be identifying both the desk and the trader who did every trade? That’s not required anywhere else, and certainly looks like overkill.
Under the reporting obligations, we find another oddity:
(a) Assigning reporting duties. A security-based swap, including a security-based swap that results from the allocation, termination, novation, or assignment of another security-based swap, shall be reported as follows:
It looks like we are missing an important section. Sure enough, we find it in the proposed rule:
(1) Platform-executed security-based swaps that will be submitted to clearing. If a security-based swap is executed on a platform and will be submitted to clearing, the platform on which the transaction was executed shall report to a registered security-based swap data repository the information required. (emphasis added)
And one more item in the proposed rule:
(i) Clearing transactions. For a clearing transaction, the reporting side is the registered clearing agency.
I think that means that the SEF reports the original trade, and the DCO immediately reports the cleared trade. What about lifecycle events for cleared swaps? Here the final rule says:
(i) Generally. A life cycle event, and any adjustment due to a life cycle event, that results in a change to information previously reported … shall be reported by the reporting side, except that the reporting side shall not report whether or not a security-based swap has been accepted for clearing.
Back to the proposed rule:
(ii) Acceptance for clearing. A registered clearing agency shall report whether or not it has accepted a security-based swap for clearing.
So, if the reporting side of the original trade is the SEF, and the DCO reports that it accepted the trade for clearing, does the DCO report the life-cycle events of cleared swaps? That should be the case, but the rules are a bit confusing about that.
What Transactions Must be Reported?
This is obviously a crucial question, and the final rule says:
(1) A security-based swap shall be subject to regulatory reporting and public dissemination if:
(i) There is a direct or indirect counterparty that is a U.S. person on either or both sides of the transaction; or
(ii) The security-based swap is accepted for clearing by a clearing agency having its principal place of business in the United States. (emphasis added)
And an indirect counterparty is defined as:
Indirect counterparty means a guarantor of a direct counterparty’s performance of any obligation under a security-based swap such that the direct counterparty on the other side can exercise rights of recourse against the indirect counterparty in connection with the security-based swap; for these purposes a direct counterparty has rights of recourse against a guarantor on the other side if the direct counterparty has a conditional or unconditional legally enforceable right, in whole or in part, to receive payments from, or otherwise collect from, the guarantor in connection with the security-based swap.
So a swap done between, for example, an EU dealer and a guaranteed EU subsidiary of a US corporation is reportable in the US, as well as by both parties in Europe. How fun! And who reports in the US? Back to §242.901.
In addition, the final rule requires reporting of all swaps in existence on the rule’s effective date (called backloading), and, although there is a phase-in for the rule as a whole, there doesn’t appear to be a phase-in period for backloading.
What Data Has to be Reported?
Here, in addition to the usual transaction material, the final rule requires:
(2) As applicable, the branch ID, broker ID, execution agent ID, trader ID, and trading desk ID of the direct counterparty on the reporting side;
Since only one side is reporting under the SEC rule, in dealer-to-dealer trades this appears to mean that the reporting dealer must supply all this information, but not the non-reporting dealer. What that accomplishes I’m not sure.
There’s one other data requirement in this section:
(5) To the extent not provided pursuant to paragraph (c) or other provisions of this paragraph (d), any additional data elements included in the agreement between the counterparties that are necessary for a person to determine the market value of the transaction;
Thus it appears that the reporting party must determine what data is necessary for an outside entity to price the transaction, and include that if it’s not already delineated.
This section requires immediate public availability of the usual information (i.e., no identification of the parties) with this exception:
(3) Any information regarding a security-based swap reported pursuant to § 242.901(i);
And 242.901(i), in the proposed rule, says,
(i) Clearing transactions. For a clearing transaction, the reporting side is the registered clearing agency that is a counterparty to the transaction.
Does this mean that cleared trades are reported but aren’t publicly available? If so, what is the logic for that? If not, what does it mean? Beats me.
There is a significant section in the final rule called § 240.901A, covering reports the Commission is expecting from the staff “regarding the establishment of block thresholds and reporting delays.” The Commission will use these reports to determine “(i) … what constitutes a large notional security-based swap transaction (block trade) for particular markets and contracts; and (ii) the appropriate time delay for reporting large notional security-based swap transactions (block trades) to the public.” One of the considerations the rule highlights is “potential relationships between observed reporting delays and the incidence and cost of hedging large trades in the security-based swap market, and whether these relationships differ for interdealer trades and dealer to customer trades.” So block sizes and block reporting delays haven’t been decided yet.
Finally, the final rule defers the compliance dates to the proposed rule, and although the rule itself doesn’t say, the preamble lists two phases.
Compliance Date 1 – Proposed Compliance Date 1 relates to the regulatory reporting of newly executed security-based swaps as well pre-enactment and transitional security-based swaps. On the date six months after the first registered SDR that accepts reports of security-based swaps in a particular asset class commences operations as a registered SDR, persons with a duty to report security-based swaps under Regulation SBSR would be required to report all newly executed security-based swaps…Registered SDRs would not be required to publicly disseminate any transaction reports until Compliance Date 2.
Compliance Date 2 – Within nine months after the first registered SDR … commences operations … (i.e., three months after Compliance Date 1), each registered SDR in that asset class …would be required to comply with Rules 902 (regarding public dissemination), 904(d) (requiring dissemination of transaction reports held in queue during normal or special closing hours), and 905 (with respect to public dissemination of corrected transaction reports) for all security-based swaps in that asset class—except for “covered cross-border transactions,”
So, six months from sometime for reporting, and nine months for public disclosure.
Given the long delay between the CFTC’s reporting rules and these, we might expect that there would have been considerable communication between the agencies, and there might have been. It does appear that the CFTC is totally re-examining its reporting rules, and that might be a good thing. Meanwhile, as firms get ready to report SEC-regulated swaps, the situation still looks pretty muddy. It might get better, but I’m not very optimistic about that.