Effective and Better SDR (Swap Data Repository) reporting for CFTC Regulator

·         6351-01-P

COMMODITY FUTURES TRADING COMMISSION

17 CFR Chapter I

RIN 3038-AE12

Request for Comment on Part 45 and Related Provisions of the Commission’s Swap Data Reporting Rules

AGENCY: Commodity Futures Trading Commission.

ACTION: Request for comment.

SUMMARY: On January 21, 2014, the Commodity Futures Trading Commission (“Commission” or “CFTC”) announced the formation of an interdivisional staff working group (“Working Group”)¹ to review its swap data reporting rules and related provisions set forth in part 45 of the Commission’s regulations.² Among other objectives, the Working Group was asked to identify and make recommendations to resolve reporting challenges, and to consider data field standardization and consistency in reporting by market participants. Consistent with those efforts, and informed by the Working Group’s analysis to date, the Commission today requests comment on specific swap data reporting and recordkeeping rules to help determine how such rules are being applied and to determine whether or what clarifications, enhancements or guidance may be appropriate. This request for comment is limited to part 45 and related provisions.

Summary: CFTC and other regulators are interested to understand the risk in the financial system to consider the oversight functions performed by the Commission, including, but not limited to, financial surveillance; market surveillance; risk monitoring; and trade practice surveillance.  To be able to do this job, regulators need accurate underlying Trade data and process work flow to measure and monitor the risk. Currently CFTC is relying on the OTC Derivative trade information provided by GTR (Global Trade Repository) at DTCC to perform this function. In a world where transactions happen in variety of asset classes, with variety of payoffs and disparate ways to identify trade parties it is a formidable task to aggregate all aspect of the transactions.  So far global investment banks themselves are having tough time to represent this trade information in their internal systems are doing this in a piece meal approach. In that case can this problem of collecting trade information in a way that can lend to our better understanding be solved? The answer is yes. We need to focus on replicating a typical trade booking system approach in place in most banks. Of course, this is not panache for all our problems but it will capture 90% of trade information effectively that is contributing to the global financial risk in the system.

My Recommendations would be as follows

1.  Divide Transactions into various product types (Swaps, Vanilla options, Exotic options etc) 
2. Aggregate Notional values, Mark to market values and Counterparty types to estimate exposures for each asset class or Trading entity
3. Trades should reflect the lifecycle of the transaction otherwise our estimate of risk will be inaccurate
4. Trade work flow (Trade amendments, Novations, Compressions) should be reflected on the transactions
5.  Price forming data should be disseminated for market participants to understand the state of market

One can understand what a trade is telling looking at

•  Price of execution to read where the market is trading ( Price Continuation Data)
• Nature of transaction to see what risks it is creating (Product type and PET)
• counterparty details to figure the probable purpose of transaction (Counterparty info, Clearing)
• Underlying legal and collateral information to understand how to value the trade at fair value.( collateralized, independent amount, thresholds etc)

 I guess if we can replicate this model from one trade to thousands of trades effectively we are in good sh

     Confirmation Data (§ 45.3): What terms of a confirmation of a swap transaction should be reported to an SDR as “confirmation data”?

1. What information should be reported to an SDR as confirmation data? Please include specific data elements and any necessary definitions of such elements.

For every transactions, PET (primary economic terms) are the basis and needs to be disclosed if one needs to understand the transactions. These terms vary for each product type hence individual elements will be different.

For instance to measure risk of the trades below we need all the PET terms that vary by product.

·         IR swap, we need to know who is paying fixed and what floating rate etc.

·         Equity Variance swap, we need to know the Vega notional, Variance strike rate

·         Cliquet, we need to know details like Global cap,  Global floor etc

                So the list of terms is exhaustive but very long.

2. Should the confirmation data reported to an SDR regarding cleared swaps be different from the confirmation data reported to an SDR regarding uncleared swaps? If so, how?

Cleared swaps are cash collateralized compared to un cleared where collateral requirements are counterparty information are needed to understand further on the risk and value of the trade.

Therefore, information pertaining who is counterparty and Collateral related info should be reported to SDR.

4. More generally, please describe any operational, technological, or other challenges faced in reporting confirmation data to an SDR.

Collateral posting requirements and margin call process details information needs to be provided by the Trading party and reporting this information for all existing portfolio of trades is a cumbersome job. As banks are working towards optimizing the use of collateral this process will get matured and process will get simpler.