Mark Wetjen, DTCC Managing Director and Head of Global Policy
The Dodd-Frank Act’s move toward transparency in the swaps market was a deliberate attempt to shift away from an opaque market to one that encourages greater access to information and thereby further confidence in the financial marketplace.
This access, however, is hindered by the lack of harmonization between the swaps and security-based swaps data reporting rules.
In harmonizing mandates between the U.S. Securities and Exchange Commission (SEC) and U.S. Commodity Futures Trading Commission (CFTC), regulators would have greater access to the information they need, providing a more holistic view to monitor systemic risk and promote safety across derivatives asset classes.
Outside of the U.S., we’ve witnessed cross-border progress among agencies and regulatory bodies. For example, the SEC and CFTC have made laudable progress on cross-border harmonization with the EU and have introduced substituted compliance/equivalence determinations on both clearing and trade execution.
Now, the CFTC and SEC are working to accomplish similar outcomes in the derivatives markets. However, as currently written, the regulatory reporting requirements do not align with each other in many areas, hindering cross-jurisdictional transparency and imposing unnecessary complexity and costs to market participants.
To illustrate, one agency allows a trade repository to hold a market participant’s swaps data and then to report that data to the agency at the prescribed time. The other agency does not allow trade repositories to hold swaps data for a market participant; rather, the repository must send that data to the agency as soon as it is received.
This means market participants must create two different reporting systems and/or processes — one for the CFTC and one for the SEC — even though the data required for reporting is similar for both agencies.
Without harmonization around trade reporting requirements across U.S. regulatory bodies, data reporting compliance will likely become more challenging and inefficient.
In addition, the lack of consistent trade data reporting requirements between the two agencies could create significant challenges for regulatory oversight, limiting the ability to consolidate and view data across regulatory bodies and therefore creating barriers to holistically surveil the swaps markets.
Transparency ultimately brings increased market confidence. Accordingly, the SEC and CFTC should accelerate efforts to harmonize appropriate regulations and consider a framework that permits substituted compliance.
As first mentioned in the 2017 Capital Markets Report, the Treasury Department recommended greater harmonization between the SEC and CFTC, specifically the use of “alternative compliance regimes — for example, a framework of interagency substituted compliance or mutual recognition — for any areas in which effective harmonization is not feasible.”
This type of approach would benefit regulatory agencies as well as market participants by minimizing duplicative or overlapping requirements, thereby further reducing operational risks and improving the quality of the data necessary for effective market surveillance.
Substituted compliance could also be an efficient approach, as it would not require the reopening of current swaps data rules, thereby eliminating obstacles inherent in having to reconsider current rulesets at both agencies — a lengthy and complicated process.
Allowing substituted compliance between the SEC and CFTC swaps data reporting rules would address current overlaps and create clear-cut efficiencies for market participants.
Coordination between the two agencies is not a novel concept, and in fact, initial efforts are already underway. The recent Memorandum of Understanding (MOU) between the two agencies is a necessary first step and the CFTC’s April 2018 white paper, "Swaps Regulation Version 2.0," reaffirmed its commitment to reform efforts.
With the stage set for cross-regulatory agency harmonization efforts, the CFTC and SEC should prioritize and, indeed, expedite these efforts that are critical to achieving greater transparency into the swaps market.