CFTC (Dodd-Frank) Reporting
The Swap Data reporting rules are the US government’s response to the 2007/8 financial crisis and the G20 Pittsburgh agreement that banks and financial firms must report all OTC derivative trading activity so that regulators could monitor systemic risk. The rules are part of the Dodd-Frank Act and overseen by the CFTC and the SEC.
The CFTC, or Commodity Futures Trading Commission, is a regulatory agency in the United States that oversees the derivatives markets, including futures contracts, options on futures, and swaps. It was established in 1974 and derives its regulatory authority from the Commodity Exchange Act (CEA).
The primary role of the CFTC is to ensure the integrity of the derivatives markets by regulating their participants, preventing fraud and manipulation, and promoting transparency. Some key functions of the CFTC include:
- Market Surveillance: The CFTC monitors the derivatives markets to detect and prevent manipulative and fraudulent activities. This includes overseeing trading practices and ensuring fair and orderly markets.
- Registration and Regulation: The CFTC requires certain market participants, such as futures exchanges, commodity pool operators, commodity trading advisors, and futures commission merchants, to register with the agency and comply with its regulations.
- Enforcement: The CFTC has enforcement authority to investigate and prosecute individuals and entities that violate the CEA or CFTC regulations. This includes actions against market manipulation, fraud, and other illegal activities.
- Rulemaking: The CFTC develops and implements rules and regulations to govern the derivatives markets. These rules cover areas such as position limits, trading practices, reporting requirements, and market transparency.
- Clearinghouse Oversight: The CFTC oversees derivatives clearinghouses, which are central counterparties that facilitate the clearing and settlement of derivatives trades. This oversight is aimed at ensuring the safety and efficiency of the clearing process. It sets standards for risk management, margin requirements, and default procedures to reduce counterparty risk and safeguard financial stability.
Overall, the CFTC plays a crucial role in maintaining the integrity and stability of the derivatives markets, which are important for managing risk and price discovery in various sectors of the economy.
What is CFTC Reporting?
The U.S. Commodity Futures Trading Commission (CFTC), a federal agency overseeing derivatives markets, mandates reporting requirements to enhance transparency, monitor market activities, and identify potential abuse or manipulation.
Reporting Obligations
Firms trading over the counter (OTC) derivatives in the U.S. must report details to a registered Swap Data Repository (SDR), including:
- Part 43: Real-time reporting to provide pricing transparency to the market.
- Part 45: Transaction reporting to allow regulators to monitor systemic risk.
The CFTC oversees reporting for all OTC derivatives across asset classes like credit, equity, foreign exchange, interest rates, and commodities.
Implementation Timeline
CFTC reporting commenced in 2013, with DTCC, CME, and ICE operating as SDRs. In December 2022, the CFTC implemented substantial revisions to the reporting rules, known as the CFTC ReWrite.
Regulatory Background
The Dodd-Frank Act, a comprehensive financial regulation enacted after the 2008/2009 crisis, aimed to restore public confidence, and prevent future crises. Title VII of the Commodity Exchange Act (CEA) grants the CFTC regulatory authority over swaps, except for security-based swaps regulated by the SEC. Under Dodd-Frank, a swap encompasses all financially settling swaps, options, physical forwards, and physical options. These OTC derivative swaps must be reported to a registered SDR.
What do you have to report?
Firms trading OTC derivatives must report all details of swaps to the Commodities and Futures Trading Commission (CFTC) via a registered Swap Data Repository (SDR). This includes:
• Reporting real-time PPD (public price dissemination) data to provide transparency on pricing to the market (Part 43).
• Reporting the full swap transaction data and daily valuations for all open swap transactions (Part 45).
CFTC reporting commenced in 2013. The CFTC implemented a wholesale revision of the reporting rules, known as the CFTC ReWrite, including new data standards in December 2022.
Further revisions including the adoption of UPI (unique product identifiers) and an ISO 20022 messaging schema are expected in the next couple years.
UPI and CFTC ReWrite Phase 2
January 29 more precisely saw the implementation of the CFTC ReWrite Phase 2 which means the adoption of UPI (Unique Product Identifier). After many years in the making the UPI might be having its debutants ball in the USA but that just gets the ReWrite/Refit party circuit started.
What does 29 January 2024 look like for CFTC & UPI?
CFTC Rewrite Phase 2 contains two items of good news:
- The CFTC descoped UPI for commodity asset class. So, UPI is being implemented for credit, equity, FX, and interest rates but not commodity.
- The CFTC also descoped ISO 20022 messaging because they wanted to wait until UPI is also ready for commodities.
Some may argue it’s only postponing the pain as the above postponements will result in a Phase 3, likely in 2025, but for the time being given the evident confusion around UPI, this is probably best for most firms reporting to the CFTC.
Once firms have designed and implemented a functioning UPI process, they will have the joy/pain of ensuring that UPI info is accurately incorporated into regulatory reporting processes given that:
- UPI will be required on all Part 43/PPD submissions to the SDR.
- UPI will be required on all Part 45 trade submissions to the SDR.
- UPI will be required on all Part 45 valuation submissions to the SDR.
Terminations and Erroring out (Action Types TERM & EROR) will not require UPI for either Part 43 PPD or Part 45 trade submissions. This is to accommodate removing previous submissions that may have been reported prior to UPI being applicable.
Looking at the message specifications for one leading SDR, a handful of previously submittable fields have been deprecated. For example, Underlier ID is no longer required as this information is now embedded within the UPI.
A new paradigm
More interestingly there are fields which will be reported to the CFTC based on data that is derived from the UPI but are not submitted by the reporting firm, such as UPI Status, UPI Instrument Type and UPI Delivery Type. This is essentially a new paradigm for transaction reporting where a range of fields will be sourced from an external data provider (ANNA-DSB) and reported to the regulators despite not being submitted into the SDR by the reporting firm.
This will also impact firms’ control frameworks as they need to ensure that the various product attributes within their systems are aligned to the correct UPI which they’ll submit to the SDR. They’ll also need to consider reconciling fields the SDR derived from the UPI to their source systems despite not having submitted these fields.
