The rules may be complicated but taken step-by-step, are not incomprehensible.
OTC Derivatives Data Reporting and aggregation – Industry Approach
In accordance with the G-20 leaders’ agreement in Pittsburgh struck in September 2009, the Financial Stability Board, along with a working group led by representatives of the Committee on Payment and Settlement Systems, the International Organization of Securities Commissions and the European Commission, outlined 21 recommendations to address pertinent issues of OTC derivatives product standardization, central clearing, electronic trading and reporting of OTC trades to trade repositories.
In particular, recommendation 19 outlines the need to identify the minimum data reporting requirements – inclusive of cleared and uncleared OTC trades – to be reported to the trade repositories, which would in turn furnish the same to the public and regulators. Additionally, it outlines the need to develop a methodology and mechanism for aggregating the data on a global basis.
Consistent with this recommendation, CPSS and IOSCO jointly issued a consultation paper in August 2011 to develop a framework of OTC derivatives data reporting and aggregation requirements.
The report framed out guidelines around minimum data reporting requirements (e.g., inclusion of trade economics, counterparty information, underlying information, operational and event data), data access (e.g., access of data by market regulators, central banks, prudential supervisors and resolution authorities) and methodology and mechanism of data aggregation by creating a system of legal entity identifiers.
In all, 32 comments1 were received and they were incorporated in the final CPSS-IOSCO report published in January.
The final report provides a detailed guideline on OTC derivative trade reporting and capturing:
Data reporting requirements:
i. Functional Reporting: segmented into collating trade repository operational data; product, counterparty and underlier information; trade economics, valuation and event data
ii. Data Field Reporting: Outlines the list of potential data fields required to be captured for each asset class such as commodity, credit, interest rate, forex and equity derivatives
Data collection approach:
i. Lifecycle Approach: Data is to be reported from inception throughout the life of the swap until the expiry or scheduled termination of the swap.
ii. Snapshot Approach: Data is to be reported from inception followed by periodic updates as and when the changes occur to the contract since the previous update.
OTC Derivatives Trade Reporting – the CFTC Approach
The final rules adopted by the CFTC in December 2011 on OTC trade reporting incorporates the aforementioned approaches toward OTC derivatives transaction data collection and reporting. The final CFTC rules require market participants to furnish swap data upon execution or shortly thereafter to a swap data repository, which in turn is required to disseminate a portion of that data to the public.
If a swap is executed outside a SEF (i.e., an off-facility swap), the CFTC advocates the use of a “designated reporting counterparty” to be responsible for reporting the swap creation, pricing and transaction information. However, if a swap is executed on a SEF or through a designated contract market, the counterparties will not be responsible for reporting the swap transaction data to an SDR. Instead, the SEF or DCM needs to report that data. The highest precedence for reporting counterparty is SD followed by MSP2 and then all others.
Additionally, the final CFTC rule stipulates that:
If a transaction occurs between a non-SD/MSP entity3 that is a financial entity and a non SD/MSP that is a non-financial entity, the reporting onus lies with the financial entity.
If a transaction occurs between two non-SD/MSP’s, of which only one is a U.S. person, that person becomes the reporting counterparty.
If both the counterparties are of the same status, the reporting counterparty definition needs to be agreed as part of the swap agreement for off-facility swaps and post-execution agreement for swaps executed on SEF/DCM platforms.
Reporting Data: Primary Economic Terms and Confirmation Data
“Swap creation data,” which includes both PET4 and confirmation data, needs to be reported to the repository by the reporting counterparty. The construct of a swap’s PET can be broken down into two components, swap transaction information and swap pricing information. Swap transaction and pricing information includes:
Time and date of the swap execution
Indicator whether the swap is cleared or uncleared type
Price information of the swap
Day count convention
Unique product, counterparty and swap identifier
Effective and end dates
Notional and settlement currency
Payment and reset frequency
Indication of collateralization
Indication of end-user exception
The swap transaction and pricing information, however, does not identify the counterparties involved in executing the swap trade. But the swap’s PET does include all the aforementioned data including the identity of the counterparties involved in the trade. The confirmation data includes the details of all terms agreed at the time of confirmation.
The final CFTC rule requires all market participants to keep “full complete and systematic” records, details of which are expected to be finalized in forthcoming CFTC releases. All such records are required to be kept in electronic form throughout the life of the swap and for five years following the termination of the swap. Records would be required to be readily accessible by the registered entity or counterparty in question via real time electronic access throughout the life of the swap and for two years following the final termination of the swap. In addition, the data must be retrievable within three business days.
Non-SD/MSP swap counterparties, by contrast, have the option of keeping their records in paper form even if they were created electronically. Such records must be retrievable within five business days for the period during which the records are required to be retained.
The final CFTC rule requires market participants to continue reporting swap data on an ongoing basis to the same SDR to which the swap was initially reported. Market participants may choose to furnish a “daily snapshot” of the PET of the swap or may opt to report upon any event that results in the change of the PET of the swap trade.
DCOs are responsible for reporting continuation data for any swap they clear, while the reporting counterparty for any uncleared swap is responsible for providing the continuation data to the SDR. The rule requires that a SD/MSP/DCO reporting counterparty report the continuation data on the same day a relevant change occurs [e.g., assignments and novations].
Non-SD/MSP reporting counterparties can report the continuation data on or before the second business day following the date of the relevant change during the first year of reporting and no later than first business day following the date of relevant changes thereafter.
The compliance schedule recommended in the final rule follows a staggered approach5 based on the product type and reporting counterparty status. For all exchange-traded interest rate and credit swaps, the real time and SDR reporting compliance date is the later of July 16, 2012 or 60 days after the final rules defining swap, swap dealer and major swap participant are published in the Federal Register.
The real-time reporting requirement for off-facility interest rate and credit swaps is the later of July 7, 2012 or 60 days after defining the final rules of swap, SD and MSP.
1IOSCO comments, CPSS comments
2For a detailed note on reporting obligations when a SD or MSP is the reporting counterparty – please refer to this document.
3For a detailed note on reporting obligations when a non-SD/MSP counterparty is the reporting entity – please refer to this document.
4For details on minimum PET data – please refer to this document.
5For a detailed note on the phased approach of the compliance schedule – please refer to this document.