The Commodity Futures Trading Commission (CFTC) is proposing a significant, new reporting burden on swaps reporting parties and on swaps data repositories (SDRs). The proposal would impose new requirements on SDRs to verify the accuracy and completeness of swap data. The SDR would be required to regularly distribute “open swaps reports,” delineating the counterparty’s SDR data, to its reporting counterparties. Each reporting counterparty would then be required to compare this data to their own books and records to determine if the SDR data is complete and accurate, even for terminated swaps, and to confirm the accuracy of the data to the SDR.

The proposal may create significant technological and back-office challenges for reporting counterparties, creating an additional compliance hurdle for reporting entities.

The proposal

On May 13, 2019, the Commission published in the Federal Register a proposal to amend its rules relating to certain SDR and data reporting requirements.1 The proposed rules would (i) update requirements for SDRs to verify swap data with reporting counterparties; (ii) update requirements to correct swap data errors and omissions for SDRs, reporting counterparties and other market participants; and (iii) update and clarify SDR operational requirements to ensure that data is available to the CFTC and the public as required by the Commodity Exchange Act. This is the first of three expected rulemakings intended to implement the CFTC’s previously released “Roadmap to Achieve High Quality Swaps Data.”2

Who would be affected by the proposal?

The proposal mainly applies to SDRs and all reporting counterparties. This will affect particularly swap dealers (SDs), major swap participants (MSPs) and derivatives clearing organizations (DCOs) but could also affect those end users that are reporting counterparties.

What new requirements would the proposal create for reporting counterparties?

As proposed, the SDR would be required to regularly distribute open swaps reports, delineating the counterparty’s SDR data, to its reporting counterparties. Each reporting counterparty would then have to compare this data to their own books and records to determine if the SDR data is complete and accurate.

The reporting counterparty would then be required to send either a notice of verification of data accuracy to the SDR or a notice of discrepancy indicating that the data in the report contains one or more discrepancies. In other words, SDRs would no longer be able to rely on the negative consent of reporting counterparties to verify data.

If the SDR makes a good faith effort to comply with these data verification rules and follows its policies and procedures, the reporting counterparty would be held responsible for failing to meet its responsibilities to respond to an open swaps report.

What is the time frame required for verification by a reporting counterparty under the proposal?

SD/MSP/DCO reporting counterparties would receive an open swaps report weekly and be required to respond with a notice of verification of data or a notice of discrepancy within 48 hours of the SDR providing the report (i.e., making it available); for non-SD/MSP/DCO reporting counterparties, those time frames would be monthly and within 96 hours.

Is submitting a notice of discrepancy by a reporting counterparty enough under the proposal?

No. Submitting a notice of discrepancy with the SDR would not be sufficient under the proposal. Reporting counterparties would be required to submit corrected swap data to the SDR as soon as technologically practicable, but no later than three business days after the discovery of the error or omission.

What about swaps that have ceased to be open swaps?

In the proposal, the CFTC clarifies that swap data must be corrected regardless of the state of the swap. Market participants must correct all incorrect or omitted swap data, even if the swap has been terminated, has matured or otherwise has ceased to be an open swap. The CFTC also notes in the proposal that it does not believe that this is a new requirement.

What practical issues may the proposal create for reporting counterparties?

The proposal may create a number of technical and administrative challenges for reporting counterparties. The proposal specifies the information that would be required in the open swaps report to be delivered by the SDR but does not prescribe how an SDR must communicate or distribute the open swaps report to reporting counterparties. In the release, the CFTC notes that it would expect SDRs and reporting counterparties to “work together to devise efficient and effective methods for successfully distributing the open swaps reports” and that it anticipates that “SDRs and reporting counterparties would be able to communicate easily, potentially through existing infrastructure for reporting swap data.”

However, considering the increased volume of swap data moving between SDRs and reporting counterparties, the requirement for an affirmative response by reporting counterparties to that data, and potentially differing technological and/or operational requirements imposed by the verification policies and procedures of the various SDRs, reporting parties’ back offices may need to overhaul their infrastructure to satisfy the proposed data verification requirements.

When are comments due on the proposal?

Comments on the proposal are due by July 29, 2019.