It’s now almost six months since the final deadline for compliance with CFTC Title VII Dodd Frank regulations requiring Swap Data Repository (SDR) reporting. With the proverbial dust settled and the holiday season behind, commodities trading compliance groups across the country are engaging in the next phase of Dodd-Frank implementations, including the upcoming position limits rules. However, some market participants are finding new requirements for already implemented rules springing to the forefront of their backlogs.
To understand the new requirements, it is necessary to understand the landscape in which CFTC Title VII Part 43 (Real-Time Public Reporting) and Part 45 (Swap Data Recordkeeping and Reporting Requirements) were implemented, in respect to commodities. There was also quite a bit of volatility to the requirements themselves, as many different legal interpretations regarding the exact meaning of phases such as “swap” were left in limbo. In what is arguably the most complicating implementation decision, the data standards for Part 45 included a rule permitting an SDR to allow those reporting data to it to use any data standard acceptable to the SDR. The effects of this were felt almost immediately as market participants could not begin work on delivery of the data until the SDRs committed to a format. While there were some basic guidelines presented in the rule appendices, the reality of the implementation ended up being much more complicated an endeavor.
The SDR vendor situation also played a huge role in the current situation. The first SDR approved for commodities was ICE’s SDR, Trade Vault. However, it was only provisionally approved in late June 2012. At that point, Part 45 rules included a mid-January 2013 deadline for reporting of “other” derivatives classes, which included commodities. It was seven months before the deadline and market participants participating in commodities trading only had one SDR available – in Beta. The only other SDR vendor on the horizon for commodities was the DTCC Data Repository (DDR), but their request to operate for commodities derivatives was still pending. What was interesting was the fact DDR was already operating in the credit, equity, interest rate and foreign exchange derivatives markets and due to their alignments on Wall Street with those existing swap dealers in other lines of business; DTCC had an overwhelming slice of the market share on SDR reporting for those asset classes.
However, the commodities market participants responded enthusiastically to ICE’s Trade Vault based on several compelling system features. First, the product’s interface and workflows piggybacked directly on its very popular electronic confirmation system, eConfirm. By leveraging the same interface, many commodities market participants saw a huge advantage by limiting the DFA Part 43 and 45 implementations to supplementing already existing confirmation processes with the new DFA-prescribed data fields, such as execution timestamp. In addition to the leveraging of the interfaces, ICE created some really valuable services for its customer, both by documenting which instrument types were reportable under the law, but also allowing a single message submission to be able to comply with both real-time and PET reporting requirements. DTCC’s approval for DDR to handle commodities in the U.S. didn’t come until late 2012, which was too late for most of the market participants – except the ones who already were participating in DDR in other asset classes.
With the CFTC pushing deadlines out until mid 2013, the market had some time to catch up and finish their implementations, but the delay also created some interesting data fragmentation issues. The Non-SD/Non-MSP market participants, which are sometimes referred to as “end-users”, largely ended up using ICE’s Trade Vault as their SDR. However, a large swath of swap dealers ended up with DTCC’s Data Repository and it’s not hard to see why. These commodities swap dealers were mostly big banks or very large financial institutions engaged in multi-asset class derivatives dealing in addition to many other services, most of which communicated with DTCC for other services, such as securities clearing and settlements. The larger financial institutions were also already with the communication protocol used by DDR, the Financial Products Markup Language (FpML), which was used extensively in other asset classes. This split creates an interesting set of issues for the market because of another subtle nuance to the DFA rules regarding reporting – the participant who is responsible for reporting gets to pick the destination SDR. For a market participant using ICE’s Trade Vault as it’s only SDR, executing a swap on an electronic platform (SEF or DCM) or with a swap dealer using DDR creates a situation where data reported is not “seen” by the end-user’s systems. When a third SDR is added to the market in the form of CME’s Repository Service, the reporting situation becomes even more complicated and difficult.
As market participants enter the New Year, they will be faced with prioritization of a new set of reconciliation burdens from SDR reporting. While position limits and other DFA rules may take a front seat, the entire commodities market will be left with very few market participants able to verify and reconcile the data being reporting on its behalf to the CFTC. Until the SDR data harmonization rules are enforced regulatory reporting requirements will continue to stay volatile, complex and costly due to this data fragmentation issue.