close

A Boost for Data Sharing and Market Transparency

Larry Thompson, DTCC Vice Chairman and General Counsel, shares the story behind amending the Dodd-Frank Act

It was the legislative equivalent of trying to find a needle in a haystack, but in this case the needle kept popping up. Regardless of who read through the more than 800 pages of the U.S. Dodd-Frank Act, it seemed that the team at DTCC kept halting at the same brief section of the bill. Was it possible that these seemingly innocuous provisions, tucked deep inside the legislation, could undermine one of the core tenets of the massive reform bill – to bring greater transparency and risk mitigation to the more than $500 trillion global over-the-counter (OTC) derivatives markets?

“We couldn’t believe it,” said Larry Thompson, DTCC Vice Chairman and General Counsel. “On the one hand, the bill mandated the reporting of all swap transactions to swap data repositories (SDR) to ensure regulators and the public had a clear view into the global marketplace. But on the other hand, these small provisions would require SDRs to obtain indemnification agreements from regulators before sharing data with them. In reality, these provisions would block regulatory access to data held in SDRs and hinder data sharing among U.S. regulators and policymakers globally.”

More than five years after passage of the bill, it’s still not entirely clear why Congress included the indemnity requirement in the first place. Like so many other legislative mysteries, this one has never been solved. But as Thompson notes, “how it got into the legislation was less important than how we could get it removed.”

As Thompson and his team researched the law, their initial concerns were verified. While the indemnification provisions were meant to protect the confidentiality and safety of data reported to SDRs, regulators would be unable to provide the required legal guarantee for a variety of reasons. And without an indemnity agreement, U.S. SDRs could not share data, which prevented regulators from having access to the information they needed to effectively conduct market surveillance and prevent the build-up of risk in the system.

“Congress deserves credit for requiring trade reporting by financial firms, but the indemnity provisions ran contrary to the original intent of Dodd-Frank,” said Thompson. “This section of the bill was a road block on the regulatory community’s path to mitigating risk and averting a future financial crisis.”

DTCC quickly raised a red flag on Capitol Hill and voiced concerns in Brussels and in legislative centers across Asia to draw attention to the problem and build support for a solution. Reactions were swift in the U.S. and abroad, but the gears of government didn’t move as quickly. In the years since the passage of Dodd-Frank, the U.S. House of Representatives passed a legislative fix several times, but moving the measure in the Senate proved challenging – until 2015. After more than five years of collaboration and coalition building on the part of DTCC and many others, President Obama signed into law legislation that removed the indemnity requirement from Dodd-Frank.

“It was a terrific moment, the culmination of years of work on the part of so many people to bring greater transparency to this market and protect the investing public,” Thompson said. “We are proud of our role in this effort, but we recognize there is still more work that needs to be done to fully realize the transparency and risk mitigation goals of the Group of 20 and policymakers globally.”

The 4-Year Journey To Removing the Indemnification Provisions from Dodd-Frank

2012

Bipartisan coalition of 40+ lawmakers in the U.S. House of Representatives sign on as co-sponsors of legislation identical to H.R. 742, which would remove the indemnification provisions from the Dodd-Frank Act.

Former CFTC Commissioners Scott O’Malia, Bart Chilton, and Jill Sommers publically state support for a legislative solution to address the unintended consequences of the provision.[1]

2013

FEB – Congressman Rick Crawford (R-AZ), with original co-sponsors, including Congressman Bill Huizenga (R-MI), Congressman Sean Patrick Maloney (D-NY) and Congresswoman Gwen Moore (D-WI), introduce H.R. 742 in the U.S. House of Representatives.

FEB – During a Senate Committee on Agriculture, Nutrition & Forestry hearing, former CFTC Chairman Gary Gensler identifies the indemnification issue as one that Congress may address.[2]

APRIL – Former SEC Chairman Elisse Walter reiterates the SEC’s public support for a legislative fix.[3]

JUNE – H.R. 742 passes the U.S. House of Representatives in a 420-2 recorded vote.

2014

H.R. 4413, which includes an indemnity correction provision, passes the U.S. House of Representatives.

2015

The U.S. House of Representatives passes H.R. 37, which includes indemnification correction provision.

FEB – During a February hearing before the House Agriculture Committee, CFTC Chairman Timothy Massad states that removal of the indemnification provisions would facilitate the sharing of information and collaboration among regulators to monitor risk.[4]

MARCH – Americans for Financial Reform (AFR) states in testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs that the organization supports legislation to remove the indemnification provisions.

APRIL – The U.S. Chamber of Commerce announces in Congressional testimony “…this legislative correction is crucial for global regulatory harmonization and information sharing and could also reduce complexity and costs for U.S. companies that operate abroad, while still requiring that regulators meet specific confidentiality requirements for such data.”

APRIL – During a hearing of the U.S. House Agriculture Subcommittee on Commodity Exchanges, Energy and Credit, CFTC Commissioner J. Christopher Giancarlo underscores the importance of removing the indemnification provisions from the Dodd-Frank Act.[5]

APRIL – SEC Commissioner Michael Piwowar voices his concern and calls for removal of the indemnification provisions.[6]

MAY – The U.S. Senate Banking Committee approves the Financial Regulatory Improvement Act of 2015, which includes an indemnification correction provision.

JUNE – The U.S. House of Representatives passes CFTC Reauthorization legislation, which includes an indemnification correction provision.

JULY – The U.S. Senate Appropriations Committee approves the Fiscal Year 2016 Financial Services & General Government Appropriations Bill.

DEC – The U.S. House of Representatives passes the Transportation bill, which includes an indemnity correction provision, in a 359-65 vote.

DEC – The U.S. Senate clears the Transportation bill by a 83-16 vote.

DEC – President Obama signs into law the bipartisan Transportation bill, which removes the indemnification requirement from the Dodd-Frank Act.

[1] See Commissioner Jill Sommers and Commissioner Scott O’Malia, Dissenting Statement, Interpretative Statement Regarding the Confidentiality and Indemnification Provisions of Section 21(d) of the Commodity Exchange Act, available at http://www.cftc.gov/PressRoom/SpeechesTestimony/sommers_omailadissentstatement; see also Dodd-Frank Derivatives Reform: Challenges Facing U.S. and International Markets: Hearing Before the H. Comm. on Agric., 112th Cong. (2012) (Commissioner Bart Chilton expressing support for a legislative solution), transcript available at http://agriculture.house.gov/sites/republicans.agriculture.house.gov/files/transcripts/112/112-35New.pdf.

[2] See Oversight of the Commodity Futures Trading Commission: Hearing Before the S. Comm. on Agric., Nutrition, and Forestry, 113th Cong. (2011) (colloquy between Chairman Gensler and Senator Saxby Chambliss).

[3] Chairman Elisse Walter, Secs. and Exch. Comm’n, Remarks at the American Bar Association Spring Meeting, Regulation of Cross-Border OTC Derivatives Activities: Finding the Middle Ground (Apr. 6, 2013).

[4] See 2015 Agenda for CFTC: Hearing Before the H. Comm. On Ag., 114th Cong. (2015) (colloquy between Chairman Massad and Congressman Eric Crawford).

[5] See Testimony of CFTC Commissioner J. Christopher Giancarlo Before the U.S. House of Representatives, Committee on Agriculture, Subcommittee on Commodity Exchanges, Energy, and Credit (April 14, 2015); available at http://agriculture.house.gov/sites/republicans.agriculture.house.gov/files/images/Giancarlo%20Testimony.pdf.

[6] Commissioner Michael Piwowar, Secs. and Exch. Comm’n, Remarks at the International Swaps and Derivatives Association 30th Annual General Meeting (Apr. 22, 2015).