At open meetings on November 19, the CFTC and SEC each proposed rules under the Dodd-Frank Act regarding reporting of swap and security-based swap* data to regulated swap data repositories (“SDRs”), public dissemination of real-time data by SDRs and registration and regulation of SDRs.
Swap Data Reporting to SDRs
Dodd-Frank requires swap counterparties to report transaction data to SDRs or, if no SDR will accept the information, to the CFTC or SEC, as appropriate for the type of swap. The proposed rules would:
- require reporting of specified key economic terms to an SDR upon execution of a swap;
- require ongoing reporting of specified swap “lifecycle events” to an SDR until termination or expiration of the swap;
- allocate swap data reporting obligations; and
- impose additional obligations on swap participants, including maintenance of specified policies and procedures, correction of erroneous information and provision of additional data.
The proposals envisage the use of uniform identifiers for the transaction, the parties and other data elements. These identifiers are obtained in part from “to be established” standard setting bodies.
In the SEC’s proposal, the reporting counterparty will provide identifiers for the appropriate broker, trader and desk associated with the trade. Counterparties that do not have a reporting obligation (other than certain non-U.S. persons) will be obliged to provide this information within 24 hours following a request by the SDR. All participants in an SDR will have to provide to the SDR information regarding its ultimate parent(s) and any affiliates that are also members of the SDR.
Timing of Reporting by Swap Participants
It appears that the CFTC and the SEC impose different reporting duties on swap participants.
The CFTC’s proposed rule would require certain swap information to be reported to an SDR or other real-time disseminator for that asset class as soon as technologically practicable following the execution of the swap . A counterparty’s reporting duty would be satisfied by execution on a designated contract market or swap execution facility. The CFTC defines the time of execution to be when the affirmation of the swap occurs.
The SEC’s proposed rule would require certain information to be reported only to SDRs as soon as technologically practicable, but not later than 15 minutes after execution. Other information would have to be reported to an SDR in a “reasonable time” that depends on how the swap is confirmed and executed, ranging from 15 minutes to 24 hours. Under the SEC’s proposal, a swap participant with a reporting obligation may permit a trade to be reported by an exchange or swap execution facility on which the trade is executed, but remains responsible if there is reporting failure or error. The SEC deems execution to occur at the point at which the counterparties to a swap become irrevocably bound under applicable law.
Allocation of Swap Participants’ Responsibility to Report
The proposals allocate reporting responsibilities to swap participants based upon whether they are a swap dealer, major swap participant or other counterparty. In certain instances the parties will choose who will report, such as where a swap is effected between two swap dealers or where no swap dealer or major swap participant is a party to the trade. In the SEC’s proposal, where only one counterparty to a security-based swap is a U.S. person (defined to include companies organized or having their principal place of business in the United States, among others), the U.S. person has the reporting obligation.
Public Dissemination by SDRs and Other Real-Time Disseminators
Dodd-Frank requires certain swap information to be publicly disseminated “as soon as technologically possible,” with appropriate delays for block trades. Again, the CFTC and SEC proposals on delays for reporting of block trades differ.
The CFTC’s proposed rule would allow a 15-minute delay in dissemination of trade reports for block trades, defined as appropriately reported swaps in instruments that are made available for trading on a swap execution facility or designated contract market, but that are of an “appropriate minimum size” and occur off-exchange pursuant to the swap execution facility or designated contract market’s rules. The “appropriate minimum size” for a given swap category is calculated by the SDR based upon a formula that takes into account the notional amounts of transactions and other measures of transaction size during the preceding year. In addition, dissemination of trade reports for “large notional swaps” (i.e., trades that would be block trades but that are in instruments not available for trading on a swap execution facility or designated contract market) will be subject to an unspecified time delay.
The SEC’s release proposes only general criteria for the definition of “block trades,” including absolute transaction size, transaction size relative to similar transactions, transaction size relative to the volume of the swap and transaction size relative to transactions in the underlying security. Equity total return swaps and swaps that are required by the SEC to be cleared but are not will not qualify for block trade delays, regardless of the size of the trade. Block trade information must be reported to the SDR immediately by the swap participant having the reporting obligation, and the SDR will determine whether the trade is a block trade. The SDR will disseminate a trade report, as with other trades, immediately, but will indicate that the trade is a block trade and will not include the trade size. The SDR will later disseminate a complete transaction report, indicating the block size, following a time delay of between eight and 26 hours, depending upon when the trade was executed.
Under the SEC’s proposal, no person other than an SDR will be permitted to make available transaction information relating to security-based swaps for 15 minutes following the time of execution (other than to a counterparty), unless the relevant SDR has publicly disseminated a transaction report.
SDR Registration and Regulation
The proposed rules regarding the registration and regulation of SDRs would:
- establish registration requirements for SDRs, including the application process and CFTC and SEC review processes;
- require SDRs to meet Dodd-Frank’s core principles for SDRs, including governance, conflict of interest and antitrust requirements; and
- establish additional duties for SDRs pursuant to Dodd-Frank, including data maintenance, access, disclosure and privacy requirements.
Because SDRs may operate as monopolies, and will have access to valuable intellectual property and broad authority to establish technical and operational standards that will affect market participants, the core principles will seek to address a variety of concerns, including fairness of pricing, use of reported data, provision of data to regulators, governance, dispute resolution, operating capacity and denials of access. SDRs regulated by the SEC will also be required to register as securities information processors.
The SEC has released the text of its two proposed rules, while the CFTC has only released Fact Sheets and Q&As. Following publication of the proposals in the Federal Register, there will be 45-day comment periods for the SEC’s proposals and 60-day comment periods for the CFTC’s proposals.
Davis Polk will continue to monitor these developments.
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CFTC Fact Sheet: Proposed Rule on Real Time Public Reporting of Swap Transaction and Pricing Data
CFTC Q&A: Real-Time Public Reporting Proposed Rulemaking
CFTC Fact Sheet: Proposed Rule on Registration and Regulation of Swap Data Repositories
CFTC Q&A: Registration and Regulation of Swap Data Repositories
CFTC Fact Sheet: Proposed Rule on Swap Data Recordkeeping & Recording
CFTC Q&A: Swap Data Recordkeeping and Reporting Requirements
SEC Proposed Rule: Regulation SBSR - Reporting and Dissemination of Security-Based Swap Information
SEC Proposed Rule: Security-Based Swap Data Repository Registration, Duties, and Core Principles
* In this newsflash, the term "swap" will be used to mean "swap" when used in the context of CFTC-regulated swaps and "security-based swap" when used in the context of SEC-regulated security-based swaps.