"The full potential of DLT in trade reporting is to transcend the fragmented regulatory structure by providing reference to a single, validated record of all financial transactions/positions across regulated markets."
- Swaps Regulation Version 2.0, an Assessment of the Current Implementation of Reform and Proposals for Next Steps, White Paper by J. Christopher Giancarlo, Chairman, and Bruce Tuckman, Chief Economist, CFTC, April 26, 2018.
The Swaps Reporting Regime
The "Swaps Regulation Version 2.0, an Assessment of the Current Implementation of Reform and Proposals for Next Steps" white paper outlines proposals for the reform of the regulation of swaps, intended to result in a better balance of systemic risk mitigation with robust swaps markets and economic growth.
One of the cornerstones of the regulatory reform of swaps implemented by Dodd-Frank is the requirement beginning in 2012 that all swaps be reported to swap data repositories. The swap data reporting requirement under Dodd-Frank is part of a broader G-20 regulatory initiative to require swap data reporting to swap data repositories, and to permit international regulators to aggregate swap data across swap data repositories located in different jurisdictions. Reporting is intended to give regulators knowledge of the credit risk being taken on by major banks and swap dealers on a global basis, and to increase market transparency and facilitate price discovery.
Initial swap data reporting under Dodd-Frank was ineffective due to a failure of initial regulation to specify required data fields and reporting templates with sufficient specificity. As a result, data reporting was not standardized, complete or accurate. More recently, the CFTC jointly with other international financial regulators has developed detailed technical guidance on critical data elements, standardized definitions and reporting formats. The Commodity Futures Trading Commission (CFTC) views the current state of swaps data reporting as considerably improved since 2012 and is undertaking improvements to swap data requirements, as outlined in the CFTC's 2017 Roadmap to Achieve High Quality Swaps Data.
The Role of DLT
Given the global nature of the swaps market, the CFTC must harvest swap data from swap data repositories across international jurisdictions. The White Paper states that DLT could allow the CFTC and other regulators to avoid swap data repositories altogether. Instead, regulators could access swaps data directly from swap parties automatically every time a swap is executed or updated on a distributed ledger, without the use of swap data repositories or other intermediaries. The CFTC views DLT as potentially providing quicker, cheaper and more reliable access to data. The CFTC states that it should "collaborate with other authorities to cultivate the development of 'regulator nodes' on distributed ledgers."
The white paper notes obstacles that could interfere with the use of DLT for swap reporting purposes. Distributed ledger data standards and data transmission systems would need to be standardized in order to usable by regulators. The ongoing initiative spearheaded by ISDA to standardize process and data in the swaps market (the Common Domain Model or CDM) should facilitate this standardization. The CFTC would also need the technology, expertise and resources to access and process data from distributed ledgers. This would require the CFTC to rebuild its technology infrastructure and analysis methods.
The CFTC is sensitive to security concerns arising from accessing non-public information directly from distributed ledgers, and the potential for hacking or other use of non-public information by unauthorized personnel. It warns of the need for stringent security controls and the dire consequences of a security breach.
The CFTC concludes that it is beneficial for market participants and technology firms to include the CFTC in their efforts and to collaborate for the mutual benefit of regulators and the swaps markets.