Today, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) hosted the first of two days of roundtables dedicated to swaps-related issues in light of the reforms mandated by the Dodd-Frank Act. In his opening remarks, Rick Shilts, the Director of the CFTC’s Division of Market Oversight, noted that the overarching goal of the Dodd-Frank Act in relation to swaps was to reduce the overall risk posed to the economy by swaps. The purpose of today’s roundtable was to hear the opinions of people with diverse points of view on the legislation and the reforms required by it to assist the two commissions in their rule writing efforts. The roundtable consisted of four panels:

Panel I - Swap Data Repository (SDR) Registration, Functions and Responsibilities:

  • Athanassios Diplas, Managing Director, Deutsche Bank
  • Mark Dixon, Chief Operating Officer, Evolution Markets
  • Jeff Gooch, Chief Executive Officer, MarkitSERV and Executive Vice President, Portfolio Valuations
  • Stewart MacBeth, Managing Director, The Depository Trust & Clearing Corporation (DTCC), and General Manager, DTCC Trade Information Warehouse
  • Jiro Okochi, Chief Executive Officer, Reval
  • Raf Pritchard, Chief Executive Officer, North America, TriOptima
  • Chester Spatt, Pamela R. and Kenneth B. Dunn Professor of Finance, Tepper School of Business, Carnegie Mellon University and Director of its Center for Financial Markets
  • Bruce Tupper, Director, Market Development, ICE eConfirm

The panel commenced with a discussion of the core duties of SDRs, including reporting, confirmation obligations, arrangements for the posting of collateral, internal governance and the role played by SDRs in monitoring end-users. In reference to reporting, which was described as a “key duty,” panelists stressed the need for both completeness of data, noting that SDRs need to have comprehensive views of all aspects of trading to be able to monitor for systemic risks, and effective aggregation and consolidation of data to grant regulators easy access to information in a useful format.

The panel then discussed privacy concerns, given the highly confidential nature of the information contained in SDR databases, with several panelists reporting that they already have high levels of security protocols in place around their databases. Panelists then described the methods by which regulators currently have access to the information stored in their databases, as well as the means by which they envision regulators having such access in the future. Methods included direct log-in to SDR databases by regulators, read-only access and specific reporting tailored to what regulators want to see in general, as well as flexible reporting based on specific, on-demand requests. Several panelists recognized the need for flexibility in accessing data, noting that there is a “big difference between information and data,” which requires information to be provided to regulators in a format they can use.

Finally, the panelists discussed the factors that should be looked at during the registration process for SDRs. Items discussed included the SDR’s data storage capacities, security capabilities, failure rate, compliance functions and demonstrated expertise in specific markets. The tension between wanting to encourage as many SDRs as possible to participate in the market so that there is adequate competition and the need to ensure that those SDRs that are in existence are capable of fulfilling their required duties was noted.

Panel II - Mechanics of Data Reporting:

  • Jeremy Barnum, Managing Director, Investment Banking, J.P. Morgan Chase
  • Sunil Cutinho, Director, Clearing Solutions, CME Group Inc.
  • Mark Dixon, Chief Operating Officer, Evolution Markets
  • Joseph R. Glace, Chief Risk Officer, Exelon, representing Coalition for Derivatives End­Users
  • Stewart MacBeth, Managing Director, DTCC and General Manager, DTCC Trade Information Warehouse
  • Robert Pickel, Executive Vice Chairman, International Swaps and Derivatives Association, Inc. (ISDA)
  • Raf Pritchard, Chief Executive Officer, North America, TriOptima
  • Nicholas Themelis, Chief Information Officer, MarketAxess Corporation

The panel focused on the types of data reported, the parties responsible for reporting it and the reporting of life cycle events. Panelists discussed transaction identifiers, noting the fact that their use poses challenges in that different identifiers are used for different stages of each transaction, as well as product identifiers and the need for standardization thereof. Panelists also discussed the importance of developing a method for regulators to look across markets at issues of affiliation and common control of counterparties so that they are able to aggregate information and monitor it effectively for systematic risk. The format in which information should be provided to SDRs, specifically whether it should required to be submitted in an electronic format capable of being manipulated, was also discussed. The panelists then discussed the reporting of life cycle events and the contrasts among them in regard to ordinary course life cycle events and force majeure events, as well as the contrasts between life cycle events occurring in the listed markets versus the over-the-counter markets. Finally, the panelists discussed advantages to having both parties to a trade report initial trade data, life cycle data or both. The panel concluded with a discussion of what steps could be taken to facilitate the quick implementation of any rules promulgated regarding reporting requirements.

Panel III - Models for Real-Time Transparency and Public Reporting:

  • Peter Axilrod, Managing Director, New Business Development, DTCC
  • Shawn Bernardo, Managing Director, Tullett Prebon Americas Corp., representing the Wholesale Markets Brokers Association
  • Trabue Bland, Director of Regulatory Affairs and Assistant General Counsel, ICE Trust
  • John Gidman, Executive Vice President, Loomis, Sayles & Company, Vice Chairman of SIFMA Asset Managers Group
  • Jeff Gooch, Chief Executive Officer, MarkitSERV and Executive Vice President, Portfolio Valuations
  • George Harrington, Global Head of Credit Markets, Bloomberg
  • Steve Joachim, Executive Vice President of Transparency Services, Financial Industry Regulatory Authority (FINRA)
  • Michael W. Masters, President, Masters Capital Management, representing Better Markets Inc.
  • Lee Olesky, Chief Executive Officer, TradeWeb
  • Jim Toffey, Chief Executive Officer, Benchmark Solutions

The panel focused on the mechanics for real-time reporting and the anonymity of market participants relating to real time reporting. Answers to the majority of the questions posed to the panelists, including how real-time reporting can be most beneficial to market participants, whether there should be concern for accuracy of real-time information, what data elements should be reported and what types of data fields would be most appropriate to protect the anonymity of market participants while still providing valuable data, hinged on the type of asset being traded.

Most panelists agreed that, before any meaningful discussion could be had, the SEC and the CFTC first must decide what they want to achieve through real-time reporting as many panelists felt that the end goal would dictate what type of real-time data would be most useful. There was, nonetheless, discussion among the panelists related to whether real-time reporting should be required for pre-trade data, which is more focused on pricing and liquidity, or post-trade data, which is more useful in an aggregated formatted based on asset class. The panelists generally agreed that real-time post-trade data would be more useful in monitoring systematic risk than would pre-trade data.

The panel concluded with a discussion of the potential operational costs of a real-time reporting regime. One panelist noted that most brokers already have in place real-time reporting systems for vast majority of products, making the costs to them minimal. For others, the panelists agreed that the costs will depend on product at issue, hinging in large part on the amount of automation in place at point of sale of an asset. Panelists also pointed out that there would be significant enforcement costs associated with rules requiring real-time reporting.

Panel IV - Effect of Transparency on Liquidity; Block Trade Exception:

  • Michael W. Masters, President, Masters Capital Management, representing Better Markets Inc.
  • Peter Shapiro, Managing Director, Swap Financial Group
  • Yunho Song, Managing Director/Senior Trader, Bank of America Merrill Lynch
  • Chester Spatt, Pamela R. and Kenneth B. Dunn Professor of Finance, Tepper School of Business, Carnegie Mellon University and Director of its Center for Financial Markets
  • Conrad Voldstad, Chief Executive Officer, ISDA
  • Neal Wolkoff, Chief Executive Officer, ELX Futures, L.P.

The panel focused on the definition of block trades and large transaction sizes, the effects of post-trade liquidity, and who should bear the responsibility for determining minimum block size and large transaction size. In discussing the process of defining block trades and large transaction size, the panel debated whether a consistent methodology should be applied across markets for determining appropriate block size or whether a separate methodology should be applied for each individual market. Most panelists agreed that there should be an overall methodology and that the considerations that go into size should be fairly consistent across markets, although there was some disagreement as to what the specifics of that methodology should be. The panelists did agree that whatever market structure changes might result from the introduction of a post-trade dissemination regime should be phased in gradually.