[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
HEARING TO REVIEW THE G20 SWAP DATA REPORTING GOALS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COMMODITY EXCHANGES, ENERGY, AND CREDIT
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
FEBRUARY 25, 2016
__________
Serial No. 114-44
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Agriculture
agriculture.house.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
98-918 PDF WASHINGTON : 2016
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COMMITTEE ON AGRICULTURE
K. MICHAEL CONAWAY, Texas, Chairman
RANDY NEUGEBAUER, Texas, COLLIN C. PETERSON, Minnesota,
Vice Chairman Ranking Minority Member
BOB GOODLATTE, Virginia DAVID SCOTT, Georgia
FRANK D. LUCAS, Oklahoma JIM COSTA, California
STEVE KING, Iowa TIMOTHY J. WALZ, Minnesota
MIKE ROGERS, Alabama MARCIA L. FUDGE, Ohio
GLENN THOMPSON, Pennsylvania JAMES P. McGOVERN, Massachusetts
BOB GIBBS, Ohio SUZAN K. DelBENE, Washington
AUSTIN SCOTT, Georgia FILEMON VELA, Texas
ERIC A. ``RICK'' CRAWFORD, Arkansas MICHELLE LUJAN GRISHAM, New Mexico
SCOTT DesJARLAIS, Tennessee ANN M. KUSTER, New Hampshire
CHRISTOPHER P. GIBSON, New York RICHARD M. NOLAN, Minnesota
VICKY HARTZLER, Missouri CHERI BUSTOS, Illinois
DAN BENISHEK, Michigan SEAN PATRICK MALONEY, New York
JEFF DENHAM, California ANN KIRKPATRICK, Arizona
DOUG LaMALFA, California PETE AGUILAR, California
RODNEY DAVIS, Illinois STACEY E. PLASKETT, Virgin Islands
TED S. YOHO, Florida ALMA S. ADAMS, North Carolina
JACKIE WALORSKI, Indiana GWEN GRAHAM, Florida
RICK W. ALLEN, Georgia BRAD ASHFORD, Nebraska
MIKE BOST, Illinois
DAVID ROUZER, North Carolina
RALPH LEE ABRAHAM, Louisiana
JOHN R. MOOLENAAR, Michigan
DAN NEWHOUSE, Washington
TRENT KELLY, Mississippi
______
Scott C. Graves, Staff Director
Robert L. Larew, Minority Staff Director
______
Subcommittee on Commodity Exchanges, Energy, and Credit
AUSTIN SCOTT, Georgia, Chairman
BOB GOODLATTE, Virginia DAVID SCOTT, Georgia, Ranking
FRANK D. LUCAS, Oklahoma Minority Member
RANDY NEUGEBAUER, Texas FILEMON VELA, Texas
MIKE ROGERS, Alabama SEAN PATRICK MALONEY, New York
DOUG LaMALFA, California ANN KIRKPATRICK, Arizona
RODNEY DAVIS, Illinois PETE AGUILAR, California
TRENT KELLY, Mississippi
(ii)
C O N T E N T S
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Page
Scott, Hon. Austin, a Representative in Congress from Georgia,
opening statement.............................................. 1
Prepared statement........................................... 2
Scott, Hon. David, a Representative in Congress from Georgia,
opening statement.............................................. 3
Witnesses
Rogers, John L., Chief Information Officer, Commodity Futures
Trading Commission, Washington, D.C............................ 4
Prepared statement........................................... 5
Kruse, Tara, Co-Head of Data Reporting and FpML, International
Swaps and Derivatives Association, New York, NY................ 9
Prepared statement........................................... 10
Collazo, J.D., Marisol, Managing Director and Chief Executive
Officer of DTCC Data Repository, Depository Trust and Clearing
Corporation, New York, NY...................................... 16
Prepared statement........................................... 18
Gil, Andres, Director, Center for Capital Markets
Competitiveness; Representative, Coalition for Derivatives End-
Users, Washington, D.C......................................... 24
Prepared statement........................................... 26
HEARING TO REVIEW THE G20 SWAP DATA REPORTING GOALS
----------
THURSDAY, FEBRUARY 25, 2016
House of Representatives,
Subcommittee on Commodity Exchanges, Energy, and Credit,
Committee on Agriculture,
Washington, D.C.
The Subcommittee met, pursuant to call, at 10:03 a.m., in
Room 1300 of the Longworth Building, Hon. Austin Scott of
Georgia [Chairman of the Subcommittee] presiding.
Members present: Representatives Austin Scott of Georgia,
Lucas, Neugebauer, LaMalfa, Davis, Kelly, David Scott of
Georgia, and Aguilar.
Staff present: Kevin Webb, Paul Balzano, Stephanie Addison,
Matthew MacKenzie, Nicole Scott, and Carly Reedholm.
OPENING STATEMENT OF HON. AUSTIN SCOTT, A REPRESENTATIVE IN
CONGRESS FROM GEORGIA
The Chairman. Good morning. I want to start today by
thanking you for joining the Commodity Exchanges, Energy, and
Credit Subcommittee for our first meeting of 2016.
As many of you may remember, the full House Committee on
Agriculture held a hearing last July on the implementation of
Dodd-Frank over the 5 years since it was passed. That hearing
highlighted some of the remaining challenges that regulators
must still tackle to complete the derivatives market reforms
envisioned by world leaders in the aftermath of the 2008 global
financial crisis. The purpose of today's hearing is to dive
deeper on one issue in particular and that is the status of
swap data reporting goals and to better understand what work
remains to be completed.
In response to the crisis, a crucial goal of the G20
financial reform commitments was to bring about greater
regulatory transparency in the over-the-counter derivatives
marketplace.
With that focus, the United States imposed broad data
collection requirements for OTC derivatives and established
swap data repositories to collect and maintain swap data under
the Dodd-Frank Act. The 5 years since the enactment of Dodd-
Frank have seen some significant progress in the reporting of
the OTC derivatives trades and several clear victories in the
quest for market transparency.
However, this progress remains uneven, and major gaps
remain in translating that progress in data reporting to
meaningful market oversight. Data collection alone is not
sufficient to achieve the goal of increased regulatory
transparency. Real insight into global systemic risk requires
that regulators be able to aggregate data accurately from
different SDRs here in the United States and across global
jurisdictions.
Market participants have raised serious concerns about the
status of regulatory transparency efforts. This Committee has
heard testimony about the lack of common data standards and
common reporting standards. This lack of standardization
unfortunately falls at many points on the reporting spectrum,
from inconsistency among global regulators on trade reporting
requirements to undefined data collection requirements from the
CFTC. Even something as simple as a defined way to record a
date hasn't been established. Imagining the variety of possible
variations for that one simple data point, do you start with
the month or do you start with the year, helps illustrate the
larger issue at hand.
I think we all agree that there is little regulatory value
in non-standardized, non-aggregatable data. The question at
hand then is how to continue moving the ball forward to achieve
needed market transparency and, importantly, how to do so
without forcing artificial standardization and a one-size-fits-
all approach unto a highly customized market, especially in
regard to the non-financial commodity swaps relied upon by end-
users for risk management.
We hope to leave this hearing with a better understanding
of the progress made towards meeting the reporting and
transparency goals set forth by the G20, as well as market
participants' and the CFTC's role in that process. In the end,
the success or failure of our financial reform efforts cannot
be judged by the list of rules finalized by the CFTC. Real
reform requires coordination between global regulators to
create a coherent system of regulation that fosters market
access and promotes market integrity.
We are fortunate to be joined by a panel of distinguished
witnesses here to share their views from both the regulatory
and market participant perspectives. Thank you to each of you
for appearing before us today. We look forward to hearing your
perspective on these issues and appreciate the time and effort
you've put forward to be here.
[The prepared statement of Mr. Austin Scott follows:]
Prepared Statement of Hon. Austin Scott, a Representative in Congress
from Georgia
Good morning. I want to start today by thanking you for joining the
Commodity Exchanges, Energy, and Credit Subcommittee for our first
meeting of 2016.
As many of you may remember, the full House Committee on
Agriculture held a hearing last July on the implementation of Dodd-
Frank over the 5 years since it was passed. That hearing highlighted
some of the remaining challenges that regulators must still tackle to
complete the derivatives market reforms envisioned by world leaders in
the aftermath of the 2008 global financial crisis. The purpose of
today's hearing is to dive deeper on one issue in particular--the
status of swap data reporting goals--and to better understand what work
remains to be completed.
In response to the crisis, a crucial goal of the G20 financial
reform commitments was to bring about greater regulatory transparency
in the over-the-counter (OTC) derivatives marketplace.
With that focus, the United States imposed broad data collection
requirements for OTC derivatives and established swap data repositories
(SDRs) to collect and maintain swap data under the Dodd-Frank Act. The
5 years since the enactment of Dodd-Frank have seen some significant
progress in the reporting of OTC derivatives trades and several clear
victories in the quest for market transparency.
However, this progress remains uneven, and major gaps remain in
translating that progress in data reporting to meaningful market
oversight. Data collection alone is not sufficient to achieve the goal
of increased regulatory transparency. Real insight into global systemic
risk requires that regulators be able to aggregate data accurately from
different SDRs here in the United States and across global
jurisdictions.
Market participants have raised serious concerns about the status
of regulatory transparency efforts. This Committee has heard testimony
about the lack of common data standards and common reporting
requirements.
This lack of standardization unfortunately falls at many points on
the reporting spectrum, from inconsistency among global regulators on
trade reporting requirements to undefined data collection requirements
from the CFTC. Even something as simple as a defined way to record a
date hasn't been established. Imagining the variety of possible
variations for that one simple data point--do you start with the month
or do you start with the year--helps illustrate the larger issue at
hand.
I think we all agree that there is little regulatory value in non-
standardized, non-aggregatable data. The question at hand, then, is how
to continue moving the ball forward to achieve needed market
transparency. And, importantly, how to do so without forcing artificial
standardization and a one-size-fits-all approach unto a highly
customized market, especially in regard to the non-financial commodity
swaps relied upon by end-users for risk management.
We hope to leave this hearing with a better understanding of the
progress made towards meeting the reporting and transparency goals set
forth by the G20, as well as market participants' and the CFTC's role
in that process. In the end, the success or failure of our financial
reform efforts cannot be judged by the list of rules finalized by the
CFTC. Real reform requires coordination between global regulators to
create a coherent system of regulation that fosters market assess and
promotes market integrity.
We are fortunate to be joined by a panel of distinguished witnesses
who are here to share their views from both the regulatory and market
participant perspectives. Thanks to each of you for appearing before us
today. We look forward to hearing your perspectives on these issues and
appreciate the time and effort you've put forward to be here.
With that, I'll recognize our Ranking Member, Mr. Scott, for any
remarks he'd like to make.
The Chairman. With that, I will recognize our Ranking
Member, Mr. Scott, for any remarks he would like to make.
OPENING STATEMENT OF HON. DAVID SCOTT, A REPRESENTATIVE IN
CONGRESS FROM GEORGIA
Mr. David Scott of Georgia. Thank you, Chairman Scott.
Getting data on swaps is one of the three main goals of Dodd-
Frank. The lack of data to form an overall picture of what is
happening in the markets was a major contributor to our
financial crisis. This hearing is an excellent follow-up to the
Dodd-Frank at 5 years hearing we had in July where we aimed to
make inroads to completing the G20's vision of implementing
clearing, margining, electronic execution, data reporting, and
capital standards.
Here before us now today is the challenge of getting
aggregate data from many repositories in many different
jurisdictions. I agree with the Office for Financial Research
who noted that good data are essential for good policy
decisions, and data gaps and lack of data access hinder
policymakers, hinder supervisors, and hinders regulators from
understanding and addressing the vulnerabilities in individual
institutions and markets across our financial system.
The CFTC has an important mission and will be unable to
complete it without a data system that works for those
reporting as well as the CFTC using the data. I am happy today
to see every part of this industry represented here with the
panel from every part of the data collection process. And I am
confident that with input from everyone involved, we will be
able to put together a system that works.
So I would like to thank you, Mr. Rogers, you, Ms. Kruse,
Ms. Collazo, and Mr. Gil for being here today, and I look
forward to hearing your testimony. Thank you, Mr. Chairman.
The Chairman. The chair would request that other Members
submit their opening statements for the record so the witnesses
may begin their testimony and to assure that there is ample
time for questions.
The chair would like to remind Members that they will be
recognized for questioning in order of seniority for Members
who were present at the start of the hearing. After that,
Members will be recognized in order of their arrival. I
appreciate Members' understanding.
Witnesses are reminded to limit their oral presentation to
5 minutes. All written statements will be included in the
record. You should have a timer in front of you that is pretty
accurate.
Now I would like to introduce the witnesses. Mr. John
Rogers, Chief Information Officer, Commodity Futures Trading
Commission, Washington, D.C.; Ms. Tara Kruse, Co-Head of Data
Reporting for FpML, ISDA, New York, New York; Ms. Marisol
Collazo, Managing Director and CEO of DTCC Data Repository,
Depository Trust and Clearing Corporation, New York, New York;
and Mr. Andres Gil, Director, Center for Capital Markets
Competitiveness and Representative, Coalition for Derivatives
End-Users, Washington, D.C.
Mr. Rogers, please begin when you are ready.
STATEMENT OF JOHN L. ROGERS, CHIEF INFORMATION
OFFICER, COMMODITY FUTURES TRADING COMMISSION, WASHINGTON, D.C.
Mr. Rogers. Thank you Chairman Scott, Ranking Member Scott,
and Members of this Subcommittee. I am pleased to update you on
the CFTC's progress in achieving the G20's swap data reporting
goals.
I am the Director of the CFTC's Office of Data and
Technology and serve in the role of Chief Information Officer.
In this capacity, I oversee the technology and data functions
of the Commission.
As you know, increased data reporting was a key objective
of the G20 agreement and Dodd-Frank.
The CFTC has made significant progress since 2008 where
there was virtually no reporting of swaps positions or
transactions. During the crisis, a lack of data made it
difficult for regulators and market participants to assess the
exposures and interconnectedness of major institutions.
Today, all swaps, whether cleared or uncleared, are
reported to swaps data repositories. Public websites are
providing price and volume information for individual swaps
transactions in real-time. This facilitates efficient price
discovery for all market participants, including end-users such
as farmers, ranchers and commercial businesses of all types.
As a regulator, the CFTC's ability to oversee the swaps
market has dramatically improved. But building this system is
complicated and an ongoing task. It is time and resource
intensive requiring constant updates and refinements as we
understand the data better.
As a result, the Commission is working to ensure the data
it receives is clean, consistent, accurate, and timely. It is
collaborating with market participants to analyze exactly what
data should be reported, how it should be reported, by whom,
and when. And the agency is working with industry and other
nations to harmonize and standardize our efforts.
One of the issues the CFTC is taking action to address is
the variation in how the same data from different
counterparties is reported. This causes problems when it comes
to aggregating and analyzing this information. To address this
issue, CFTC staff recently requested public comment on
technical specifications for the reporting of 120 priority data
elements. This followed months of work to identify areas where
standardization or clarification is needed. From this feedback,
the Commission will develop proposals that specify the form,
manner, and allowable values that each data element may have.
In fact, just this week the Commission held a public hearing of
the CFTC's Technology Advisory Committee to discuss this issue
among others.
The Commission is also working towards obtaining complete
data. Some required fields are not reported by participants,
and SDRs do not believe they have the authority to reject data
if it is incomplete. CFTC Chairman Massad recently underscored
his belief that the CFTC should change its rules so that SDRs
have a greater ability to improve the quality of data before it
arrives at the CFTC. Staff is looking closely at this
possibility.
Further, the CFTC is working to develop a uniform,
effective means to identify swaps and swap activity by
participant, transaction, and product type throughout the swap
lifecycle. And we are at the forefront to addressing all these
issues internationally.
I am pleased to co-chair the international task force that
is leading global harmonization efforts.
Finally, the Commission continues to fine tune its rules to
clarify which entities have an obligation to report data and
what data must be reported. It is paying particular attention
to the needs of commercial market participants, ultimately
working to eliminate reporting obligations that are not
necessary.
Thank you, Mr. Chairman, and Members of this Committee. Let
me conclude by reiterating that this swap data reporting effort
is a significant, global undertaking. Completing it properly
will take time. But I believe the agency has made significant
progress in just a few short years. Thank you again for
inviting me. I welcome your thoughts and questions.
[The prepared statement of Mr. Rogers follows:]
Prepared Statement of John L. Rogers, Chief Information Officer,
Commodity Futures Trading Commission, Washington, D.C.
Thank you Chairman Scott, Ranking Member Scott, and Members of this
Subcommittee. I am pleased to be here today to update you on the
Commodity Futures Trading Commission's (CFTC) progress in achieving the
G20's swap data reporting goals.
The CFTC oversees the futures, options, and swaps markets. As you
know, these markets are vital to our economy, affecting the prices we
all pay for food, energy, and other goods and services. They do this by
providing farmers, ranchers and businesses of all types with the
ability to manage costs and hedge commercial risk.
I am the Director of the CFTC's Office of Data and Technology and
serve in the role of Chief Information Officer (CIO). In this capacity,
I oversee the technology and data functions of the Commission. I am
responsible for strategic planning, data management, systems
development, infrastructure operations, information technology (IT)
security and technology planning.
In 2010, the role of the CIO changed significantly. As you know,
swap data reporting was one of the key goals of G20 agreement, and was
later codified in the Dodd-Frank Act. As a result, the CFTC's
responsibilities in this area were expanded following Dodd-Frank's
enactment.
Background
Since the passage of the Dodd Frank, the Commission has adopted
rules for data reporting that have fundamentally changed how we view
the markets. For example, in the fall of 2008, there was effectively no
reporting of swap transactions or positions. During the crisis, this
lack of information made it difficult for regulators and market
participants to assess the exposures of major institutions, or the
interconnectedness of those exposures. In fact, the opaque nature of
this market may have contributed to excessive risk-taking in the first
place.
Today, we see a different landscape. Increased data reporting has
provided greater transparency to market participants. Regulators have a
greater ability to assess systemic risk in the market.
For example, currently all swaps, whether cleared or uncleared,
must be reported to swap data repositories (SDRs). There are four SDRs
operating in the United States, and there are two dozen
internationally. The Commission has requirements for which market
participants must report, what and when they must report, and how they
operate.
Increased transparency and access to information on swaps has
benefited the public. For example, SDRs' public websites provide price
and volume information for individual swap transactions in real-time.
This facilitates efficient price discovery for all market participants,
including end-users such as farmers, ranchers and commercial
businesses. In addition, the CFTC provides a Weekly Swaps Report that
gives an aggregate snapshot of the market, sliced and diced in various
ways. Users of swaps also have access to data through swap execution
facility (SEF) platforms and other vendors that facilitate price
discovery.
This transparency has also fostered private sector innovation that
is further promoting the public good. For example, some companies are
analyzing swap execution facility (SEF) data and packaging it in a way
that provides a more comprehensive picture of what's happening on SEFs
at any given time. Other companies are enhancing public data by
aggregating information from SDRs in real-time.
As a regulator, the CFTC reaps the benefits of this data as well.
Our ability to oversee the swaps market has dramatically improved. As
with futures and options data, swaps data is critical in helping the
CFTC fulfill its core mission.
Over the years, the Commission has built a sophisticated
surveillance system for futures that relies on inputs from
clearinghouses, clearing members and large traders. Examples of this
data include clearing member positions by house and customer account,
as well as by individual customer; large trader reporting; the amounts
of both initial margin held, and variation margin paid and received; as
well as the financial resources of firms. These and other inputs allow
staff to look at market risk, liquidity risk, credit risk and
concentration risk on a daily basis--all at the clearinghouse, clearing
member, and trader level. For example, this helps the Commission to
stress test exposures and back test the adequacy of margin coverage,
all of which is important to oversight of the markets.
The CFTC is now building swaps into these risk surveillance
systems, to identify and monitor swaps activities and exposures. This
allows the CFTC to stress test those exposures, compare them to
available margin, and look at potential systemic issues. The Commission
looks at activity and risk at the clearinghouse, clearing member, swap
dealer and large customer level. With uncleared exposures, the CFTC
focuses on activity between counterparties, the interconnectedness of
large institutions, and other areas.
In addition to risk surveillance, the agency uses swaps data for
enforcement, economic analysis of market trends, and evaluation of new
products.
In all of these areas, swaps data has helped the agency do more to
create an efficient and accurate reporting system. It is a significant
undertaking. Futures reporting relies on a relatively small number of
reporting entities. Moreover, contracts are highly standardized.
Therefore, our reporting rules for futures are considerably less
complex. In contrast, swaps make up thousands of entities reporting on
an infinite variety of transactions. Because swaps can be traded on a
variety of platforms or bilaterally, the Commission has worked to
design a system that can analyze and aggregate swaps data from across
all these execution and clearing venues. It is important to have a
reporting system that recognizes this variation, but still enables us
to aggregate where appropriate. In addition, swaps can go through many
stages and changes, making it critical to track that swap through its
lifecycle.
Building this system is complicated and time consuming. It requires
constant updates and refinements, as we understand the data better. The
Commission is collaborating with market participants and other nations
in this work, to harmonize and standardize our efforts. Indeed, this is
not something the CFTC can do on its own. The Commission requires data
that is clean, consistent, accurate and timely. And we are continuing
to work with market participants to analyze exactly what data should be
reported, how it should be reported, by whom and when. Above all, we
are working to achieve an efficient and effective process to help us
achieve these goals.
Improving Data Reporting
The Commission is taking on a number of initiatives to improve the
accuracy, efficiency and timeliness of data reporting. They include the
following:
Making Sure the Data is Consistent and High Quality. The Commission
is working to ensure the data it receives is more consistent and high-
quality than today. Today, there can be variation in how the same
information from different counterparties is reported to the SDRs, and
in how the SDRs themselves transmit the same information to us. And
this occurs even with relatively simple pieces of information.
For example, a simple foreign exchange benchmark or a credit
default swap index may be reported seven or eight different ways by
market participants. This causes problems when it comes to aggregating
and analyzing this information.
To address the issue, in December, CFTC staff requested public
comment on technical specifications for the reporting of 120 priority
data elements. Our request for public input marks the culmination of
months of work to identify priority areas where standardization or
clarification is needed. This included feedback from a 2014 concept
release on this issue as well as constructive input from our Technology
Advisory Committee.
The priority fields include a number of swap data reporting topics,
such as counterparties, price, clearing, product, periodic reporting,
orders, options, notional amount and many others. The Commission will
use public comments to develop proposals that specify the form, manner
and allowable values that each data element can have.
Making Sure the Data is Complete. The Commission also is working
towards obtaining complete data. There are a number of challenges here.
Some required fields are not reported by participants, and SDRs don't
believe they have the authority to reject data if it is incomplete.
Though we have seen an improvement across a number of data fields,
there is additional work to do. In the past, CFTC Chairman Massad has
underscored his belief that the CFTC should change its rules so that
SDRs have a greater ability to improve the quality of data before it
arrives at the CFTC. Staff is looking closely at this possibility.
Refining Swap Identifiers. The CFTC is working to develop a
uniform, effective means to identify swaps and swap activity by
participant, transaction and product type throughout the swap
lifecycle. These include the Legal Entity Identifier (LEI) as well as
the Unique Transaction Identifier (UTI) and Unique Product Identifier
(UPI). The LEI is the most advanced. It is a critical way to identify a
specific entity and its activities. There are more than 400,000 LEIs
today.
Our goal is to expand the usefulness of the LEI so that it can be
used to identify related entities--and aggregate positions or
transactions among them, something that cannot be done efficiently
today.
Aggregation is particularly important given that many market
participants have a number of affiliates. The Commission currently can
aggregate entities manually by name, but that is time consuming and not
always accurate. The CFTC is working closely with the LEI Regulatory
Oversight Committee (ROC) and other regulators to develop solutions
that will address this challenge. The LEI ROC is a group of more than
70 public authorities from more than 40 countries. Its mission is to
coordinate and oversee the development of a worldwide framework for
LEIs, known as the Global LEI System.
International Efforts. The Commission is also a leader in
addressing these issues internationally. The CFTC co-chairs an
international task force that is leading the effort to harmonize data
reporting standards. This has been formed under the auspices of
Committee on Payments and Market Infrastructures (CPMI) and the
International Organization of Securities Commissions (IOSCO), and it
involves many representatives from regulators in the G20 nations. I am
pleased to co-chair this task force.
One of the task force's projects is to standardize the reporting of
data fields by proposing definitions and formats for each field. The
task force recently published an initial consultative document
containing a batch of data fields. The CFTC is coordinating its in-
house standardization efforts with this international work.
In addition, that same international task force on data is
developing a standardized unique transaction identifier, which is
similar to our unique swap identifier. This will enable regulators to
track a particular swap through its lifecycle.
This international forum is also developing a standardized unique
product identifier, which will enable regulators to classify swaps by
product type. They expect to issue guidance on both the UTI and UPI
this year. This work will enable us to track swaps and aggregate data
much more effectively.
Clarifying Reporting Obligations and Eliminating Unnecessary
Reporting Obligations. The Commission has also endeavored to clarify
who has the obligation to report data and what data must be reported.
It is also working to eliminate reporting obligations that are not
necessary.
For example, CFTC staff made it clear that SEFs do not have an
obligation to report confirmation data they do not possess--such as
confirmation data that is incorporated from an underlying Master
Agreement. Commission staff have made clear that SEFs only need to
report the primary economic terms and such other confirmation data to
which they already have access. This relieves SEFs of any obligation to
obtain an underlying Master Agreement or similar documentation.
The Commission has also proposed modifications to the rules
governing record-keeping and reporting of cleared swaps. Under the
current regime, if a swap is transacted on a SEF, it is reported to an
SDR. If that ``alpha'' swap is then cleared, the so-called ``beta'' and
``gamma'' swaps that are created as a result are also reported. But
those two new swaps might be reported to a different SDR than the one
to which the original alpha swap was reported, and there might not be
any record of the termination of the alpha swap. This creates
confusion.
Recently, the Commission proposed to fix these issues by creating a
simple, consistent process for the reporting of cleared swaps. That
means clarifying the reporting obligations of the clearinghouse where
the swap is cleared. If adopted by the Commission, this clarification
will help ensure that there are not multiple records of a swap that can
lead to erroneous double counting, and that accurate valuations of
swaps are provided on an ongoing basis. It will eliminate unnecessary
reporting requirements. It will help to reduce reporting costs and
improve the quality of swap data. And it will improve the Commission's
ability to trace swaps from execution through clearing.
The CFTC is taking other actions to eliminate reporting certain
obligations when unnecessary. For example, the Commission has proposed
eliminating the obligation of commercial participants to report trade
options to SDRs, as to ensure the benefits outweigh the costs.
Further, CFTC staff has eliminated the Index Investment Data
report, which we produce monthly. This is a survey of index-related
holdings of certain traders and dealers. The report was started before
our current swap reporting rules were implemented.
Enforcing Reporting Obligations. Equally important to our data
efforts is the need to enforce reporting obligations. For those
industry participants who do not make timely, complete and accurate
reporting, the Commission has carried out enforcement actions.
Recently, the Commission fined a major global bank $2.5 million for
repeated failures to comply with swap reporting obligations, including
failing to report swaps and failing to correct errors in its reporting.
And since the beginning of 2014, the CFTC has brought actions against
six other institutions, including other major banks and an exchange,
for various types of reporting violations. Promoting compliance in
record-keeping and reporting, and holding those who are not in
compliance accountable, remains an important priority.
Conclusion
Thank you, Mr. Chairman and Members of this Committee. Let me
conclude by reiterating that this swap data reporting effort is a
significant, global undertaking. As with any such effort, completing it
properly will take time.
However, there should be no doubt that this is a priority and the
Commission has made substantial progress. During the crisis, regulators
and market participants were unaware of what the swaps market truly
looked like. Today, we have much greater transparency into those
markets, which benefits regulators, lawmakers and market participants
alike. As the CFTC refines the data and reporting system over time, we
will further enhance that transparency and thereby, the resiliency of
our financial system.
Thank you for again for inviting me. I welcome your thoughts and
questions.
The Chairman. Ms. Kruse? Ms. Kruse?
STATEMENT OF TARA KRUSE, CO-HEAD OF DATA REPORTING AND FpML,
INTERNATIONAL SWAPS AND DERIVATIVES
ASSOCIATION, NEW YORK, NY
Ms. Kruse. Chairman Scott, Ranking Member Scott, and
Members of the Committee, thank you for the opportunity to
testify today. My name is Tara Kruse, and I am Co-Head of Data
Reporting and FpML at the International Swaps and Derivatives
Association.
A central component of the G20 commitments in Pittsburgh
was the reporting of derivatives to trade repositories in order
to increase transparency and enable regulators to spot risk
concentrations. Recognizing derivative markets are global, the
G20 committed to use consistent standards in order to avoid
fragmentation and regulatory arbitrage.
Substantial efforts have been made toward realizing these
commitments. Today, derivatives trades in the United States are
reported to trade repositories. An increasing number of
transactions are reported globally.
Despite these advancements, U.S. regulators have struggled
to fully understand and optimize the data being reported and
are not in a position to have a complete picture of either
domestic or global risk exposures. This visibility is impeded
by the failure to use globally consistent standards that
facilitate efficient, accurate data reporting that is suitable
for aggregation and systemic risk analysis.
Contributing to the challenge is the fact that each
regulator has developed a unique set of reporting requirements
and devised its own list of reportable data fields. This not
only makes reporting complex and more costly for derivatives
users, but it means the data cannot be aggregated to obtain a
clear view of global derivatives trading activity.
Let me illustrate this important point with a very simple
analogy. Imagine if every car dealership in the United States
and around the world was required to report basic facts about
each and every car that it sold, including the car's size. Due
to differences in regulatory oversight of these dealerships,
some dealers reported size as the car's weight. Others as the
number of passengers it held, yet others as its length or its
horsepower.
The solution is for regulators to work together and with
the industry to agree on a core list of systemically important
data fields that are reported in a consistent manner based on
existing data and messaging standards. ISDA stands ready to
help in this regard. We have worked to develop standard
taxonomies and standard messaging language, and we are
currently leading an industry initiative to develop standard
product identifiers.
ISDA and its members would suggest several concrete steps
that could be taken to improve data reporting and systemic risk
monitoring, while at the same time reducing the cost and
complexity for market participants.
First, CPMI-IOSCO should lead global data harmonization.
Agreement on common data standards should be achieved in
coordination with the efforts of the Harmonization Group of
global regulators established by CPMI and IOSCO. This group has
issued consultations on standard transaction and product
identifiers, as well as reportable data elements. Consistency
on these standards is key to achieving greater harmonization.
It is important the CFTC and SEC are aligned with this global
initiative and do not engage in further overlapping and
potentially contradictory data proposals.
Second, data fields should be specified and based on
existing market standards. Regulators should work with industry
to ensure regulatory requirements closely align with prevailing
industry-defined terms and practices. All data elements
required by regulators to meet their objectives should be
explicitly specified in the regulations. Existing derivatives
messaging standards, such as Financial products Markup
Language, or FpML, should be leveraged where possible.
Third, domestic regulators should align on data rules.
Given that both the CFTC and the SEC developed reporting rules
in response to the same piece of legislation, the rationale for
issuing different requirements is difficult to comprehend. The
split between swaps and security-based swaps undermines the
ability of the Commissions to aggregate their data and provide
Congress with a holistic view of risk in the U.S. derivatives
market.
Finally, reporting requirements should be rationalized and
streamlined. Regulators should determine what data they need to
monitor systemic risk and simplify reporting requirements
accordingly. Certain data fields are currently required to be
reported or proposed to be required that offer little insight
into risk. This increases the volume of data that needs to be
analyzed, to little benefit, and increases the cost and
complexity of reporting which in turn undermines data quality.
Regulators should agree on a meaningful set of globally
consistent data fields that enables them to meet their
regulatory objectives. Regulators should also assign the sole
responsibility for both the reporting of data and the accuracy
of the data for a transaction to a single party which is best
situated to do so, thereby reducing the cost and burden to end-
users.
Thank you for inviting me to speak today on this important
topic. ISDA is a strong proponent of improving the accuracy,
consistency, and efficiency of transaction reporting while
mitigating its costs and burdens. We stand ready to help. Thank
you.
[The prepared statement of Ms. Kruse follows:]
Prepared Statement of Tara Kruse, Co-Head of Data Reporting and FpML,
International Swaps and Derivatives Association,\1\ New York, NY
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\1\ Today, ISDA has over 850 member institutions from 67 countries.
These members comprise a broad range of derivatives market
participants, including corporations, investment managers, government
and supranational entities, insurance companies, energy and commodities
firms, and international and regional banks. In addition to market
participants, members also include key components of the derivatives
market infrastructure, such as exchanges, clearing houses and
repositories.
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Chairman Scott, Ranking Member Scott, and Members of the
Subcommittee, thank you for the opportunity to testify today.
It's now more than 6 years since the Group of 20 (G20) nations
gathered in Pittsburgh and agreed to a set of commitments to reform the
over-the-counter derivatives market. A central component of those
commitments was the reporting of derivatives to trade repositories in
order to increase transparency and enable regulators to spot risk
concentrations. Recognizing derivatives markets are global, the G20
committed to implement consistent standards on a global basis in order
to avoid fragmentation and regulatory arbitrage.
Over the past few years, substantial efforts have been made toward
realizing this commitment. Today, virtually all derivatives trades in
the U.S. are reported to a trade repository. An increasing number of
jurisdictions around the world have also imposed such a requirement.
However, while the letter of the commitment is being realized, the
spirit of this sound public policy goal is not.
U.S. regulators have struggled to fully understand and optimize the
data being reported. Also, they are not in a position today to receive
a complete picture of global risk exposure. This comprehension is
impeded by a lack of regulatory endorsed, globally consistent standards
that facilitate efficient, accurate data reporting that is suitable for
aggregation and systemic risk analysis.
Contributing to the challenge is the fact that each regulator has
developed a unique set of reporting requirements and devised its own
list of reportable fields. This not only makes reporting complex and
costly for derivatives users, but it means the data cannot be
aggregated to obtain a clear view of global derivatives trading
activity.
This is not just a case of divergent reporting rules between
different countries. There are also differences in reporting
requirements within the same jurisdiction. For instance, the CFTC and
SEC require different data to be reported and have set different
parameters to determine which trades should be subject to reporting.
These differences are unnecessary and prevent regulators from meeting
the G20 objective of monitoring and mitigating systemic risk. They also
run counter to regulators' commitment to implement consistent global
standards.
Let me illustrate this important problem with a simple analogy.
Imagine if every car dealership in the U.S. and around the world was
required to report basic facts about each and every car sold, including
the car's size. Due to differences in regulatory oversight of all of
these dealerships, some dealers reported size as the car's weight.
Others as the number of passengers it held. Yet, others as its length
or its horsepower.
As the example makes clear, the answer here is not to require more
data to be reported. Instead, regulators should work together and with
the industry to agree on globally consistent reporting requirements, as
well as data and messaging standards. ISDA stands ready to help in this
regard. We've worked to develop standard taxonomies and a standard
messaging language, and we are currently leading an industry initiative
to develop standard product identifiers.
ISDA and its members would suggest several concrete steps that
could be taken to improve data reporting and systemic risk monitoring,
while at the same time reducing cost and complexity for reporting
parties.
CPMI-IOSCO Should Lead Global Data Harmonization
Agreement on common standards should be achieved in coordination
with the Committee on Payments and Market Infrastructure (CPMI)
and International Organization of Securities Commissions
(IOSCO) which have established a Harmonization Group comprised
of global regulators. CPMI-IOSCO has issued consultations on
standard transaction and product identifiers, as well as other
data elements. Consistency on these standards is paramount to
achieving greater harmonization. It's important the CFTC and
SEC are aligned with this global initiative and do not engage
in further overlapping and potentially contradictory data
proposals.
Data Fields Should be Specified and Based on Existing Market
Standards
Regulators should work with industry initiatives, such as ISDA's
Symbology project,\2\ to ensure regulatory requirements closely
align with prevailing industry defined terms and practices. All
data elements required by regulators to meet their objectives
should be explicitly defined in the regulations. Existing
derivatives messaging standards, such as Financial products
Markup Language \3\ (FpML), should be leveraged where possible.
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\2\ http://www2.isda.org/functional-areas/symbology/.
\3\ http://www.fpml.org/.
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Domestic Regulators Should Align on Data Rules
The CFTC and SEC rules should be aligned. Given both agencies
developed reporting rules in response to the same piece of
legislation, the rationale for issuing different requirements
is difficult to comprehend. The split between swaps and
security-based swaps is a creation of the U.S. regulatory
system which undermines the ability of the CFTC and SEC to
aggregate their data and provide Congress with a holistic view
of risk in the U.S. derivatives market.
Reporting Requirements Should be Rationalized and
Streamlined
Regulators should determine what data they need to monitor
systemic risk and simplify reporting requirements accordingly.
Certain data fields are currently required to be reported or
proposed to be required that offer little insight into risk.
This increases the volume of data that needs to be analyzed, to
little benefit, and increases the cost and complexity of
reporting which undermines data quality. Regulators should
agree on a meaningful set of globally consistent data fields
that enables them to meet their regulatory objectives. Further,
regulators should assign the sole responsibility for the
reporting of accurate data for a transaction to a single party
which is best situated to provide timely, complete data.
* * * * *
I'd like to address these issues in more detail. Before I do, I
would like to stress that ISDA supports the intent of the G20 and the
Dodd-Frank Act to improve transparency in derivatives markets and to
ensure regulators have the information they need to monitor systemic
risk. ISDA has worked with its members to drive implementation of this
objective, for example, in its work to develop common taxonomies and
messaging standards. ISDA's work to drive implementation is also
exemplified by the recent establishment of the ISDA Symbology project
to develop a common product identifier for regulatory and reference
data purposes. This initiative will incorporate the recommendations
made by CPMI-IOSCO.
This is consistent with our mission statement: ISDA fosters safe
and efficient derivatives markets to facilitate effective risk
management for all users of derivative products. In fact, our strategy
statement was recently modified to emphasis the importance of a safe,
efficient market infrastructure for derivatives trading, clearing and
reporting.
Since ISDA's inception 30 years ago, the Association has worked to
reduce credit and legal risks in the derivatives market and to promote
sound risk management practices and processes. This includes the
development of the ISDA Master Agreement, the standard legal agreement
for derivatives, and related collateral documentation as well as our
work to ensure the enforceability of netting.
1. CPMI-IOSCO Should Lead Global Data Harmonization
The implementation of trade reporting was intended to improve
transparency in the derivatives markets and mitigate systemic risk. G20
leaders also committed to take action at the national and international
level to raise standards together to implement global standards
consistently in a way that ensures a level playing field and avoids
fragmentation of markets, protectionism and regulatory arbitrage.
Progress has been made on the former objective, but full realization of
this goal cannot be achieved without significant advancement on the
latter.
Under the CFTC's Parts 43, 45 and 46 regulations reporting to trade
repositories has been live in part since December 31, 2012 and
reporting across asset classes and by all U.S. participants to swaps
has been in place since April of 2013. Data regarding swaps that were
live on or after the enactment of the Dodd-Frank Act or which have been
transacted since have been and continue to be reported to trade
repositories. Despite the availability of swap data to the public and
to the CFTC, questions remain regarding whether the CFTC is collecting
the most useful data set and whether such data is consistent and
accurate enough to monitor market risk.
The successful implementation and oversight of the Legal Entity
Identifier to uniquely identify parties to a transaction is proof that
global regulatory collaboration can result in standards that are
extremely valuable to market risk analysis. With the LEI as precedent,
ISDA strongly supports the ongoing efforts of the CPMI-IOSCO
Harmonization Group to develop recommendations for global standards for
trade identifiers (UTI), product identifiers (UPI) and other reportable
data elements. ISDA worked with its members to develop industry
standards for trade identifiers and product identifiers in the absence
of global regulatory standards and developed best practices to improve
the consistency of reporting. Although these have been used
successfully by a majority of market participants for reporting across
the globe, comprehensive use can only be achieved through regulatory
endorsement and mandates.
ISDA has provided substantive feedback to the first three
derivatives data consultations issued by CPMI-IOSCO, including one on
an initial batch of other data elements (the ``ODE Consultation''),\4\
such as notional and clearing status. The CFTC is currently taking
comments on a Draft Technical Specifications for Certain Swap Data
Elements (``Technical Specifications''). While we commend the CFTC for
addressing the acknowledged and necessary corrections in its data
rules, it is not being done in concert with other regulatory reforms.
Despite the CFTC's role as co-chair of the Harmonisation Group and the
active participation of CFTC staff in its sub-groups, for many of the
data elements which were also part of the ODE Consultation, the
Technical Specifications asks different questions and makes different
proposals for the naming of data elements as well as their descriptions
and allowable values.
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\4\ http://www2.isda.org/attachment/NzkzNA==/CPMI-
IOSCO%20Response_ODE_9%20
Oct%202015_FINAL.pdf.
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ISDA believes the CFTC has missed an important opportunity to focus
its resources on inputting to global harmonization goals and instead
has replicated or repurposed those efforts. Any further consultation or
proposed rulemaking by the CFTC with respect to its reporting
regulations should align with and be fully-inclusive of all information
from the efforts of the Harmonisation Group with the goal of a single
industry-wide transition to the globally recommended data standards of
CPMI-IOSCO determined in accordance with its responsibilities as
assigned by the Financial Stability Board.\5\
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\5\ http://www.fsb.org/wp-content/uploads/pr_140919.pdf.
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2. Data Fields Should Be Specified and Based on Existing Market
Standards
Limitations on the usefulness of the collected data to analyze
systemic risk is not attributable to missing data as much as it is
about the quality and consistency of the data that is collected. Each
relevant national regulator has issued its own version of reporting
requirements and its own list of reportable data fields that are not
always based on existing industry standard terms, definitions and
messaging standards for derivatives. In some cases, the trade terms
required to be reported are not explicitly specified in the regulations
but instead left to SDRs and market participants to determine. These
approaches complicate the task of reporting and undermine data quality
since parties are required to interpret the data desired by the
regulator or transform the data in a way that may not align with how
the economics of the trade were agreed between the parties and
represented in the legal confirmation for the transaction.
Regulators would make significant headway in improving the rules if
they follow three principles:
1. Use of industry standards where possible.
2. Provide appropriate oversight and commitment to market
participants so they can develop industry-based solutions.
3. Be specific when developing data requirements.
Regulators Should Use Industry Standards Where Possible
The market can't trade without certain convention and standards,
just like our interstate system can't function without consistent and
specific traffic rules. The marketplace has already developed data and
trading conventions that can be readily applied on a global basis to
support the data harmonization efforts. The following standards already
exist for (i) the name, definition and values of the key economic terms
of derivatives transactions and (ii) messaging representation of these
data elements for reporting. Global standards for trade reporting
should be aligned with, and benefit from, these existing industry
standards.
Product Definitions
ISDA product definitions are incorporated by reference into
confirmations for derivations transactions. The terms they define are
the market standard references, providing legal certainty to
counterparties on the economic terms of their transactions. The CFTC,
SEC and other global regulators should align with these terms and
definitions for the sake of specificity, accuracy, and efficiency.
There is no value in redefining the framework for legal agreement of
derivatives transactions for the purposes of reported data. Rather, the
reported data should seek to mirror the terms and values as they are
agreed and confirmed between the parties to the transactions to ensure
harmonization between the execution confirmation and reporting
processes.
Using alternative terms, definitions and values for reported
transactional data requires parties to transform their trade data to
represent it in an inconsistent manner solely for the purposes of
reporting. This greatly increases the challenge of reconciling SDR data
back to a reporting counterparty's source systems or the confirmation,
and inhibits bilateral reconciliation since a non-reporting
counterparty will not have transformed their data in accordance with
the relevant reporting regulations. These challenges are further
exacerbated when the parties are required to represent the data for the
same trade differently when reporting to multiple jurisdictions. It is
not practical for parties to create, report and maintain several
different data representations of the same trade without impinging on
the clarity and certainty of the transactions terms. Aligning reporting
regulations with the applicable established product definitions is the
more accurate and appropriate baseline for representing reported data.
Messaging Standards
The other key to leveraging existing trade representation is
through the use of established reporting standards that are designed
from, and align with, the ISDA product definitions. FpML is the
predominant messaging standard for OTC derivatives, facilitating both
the electronic confirmation and electronic reporting of transactions.
Significant enhancements have been made to FpML to support both global
and jurisdictional reporting regulations. Although there are obvious
benefits to doing so, reported data does not have to be submitted
electronically via FpML for the reporting regulations to benefit from
the standards it has established for uniformly identifying certain
trade terms and values. For instance, FpML developed the only industry
standard values for ``Business Days'' which are the geographical and
non-geographical calendars by which payment dates and settlement dates
are adjusted (e.g., NYSE Business Day). The CFTC recognized this,
referring to FpML for these values in its Technical Specifications for
its redefined ``Holiday Calendars'', but does not fully embrace the
standard by aligning with the FpML data elements and scheme for all
supported data fields.
Rather than inventing its own methods, the Commission and global
regulators should align with both the ISDA product definitions and
FpML. There is simply no need or value to reinvent the terminology,
definitions or representations of swap data. Instead, efforts to
develop new standards will reduce rather than improve the quality of
the data available to meet the regulatory mandates which require the
collection of derivatives data. The CFTC and global regulators should
use these existing standards to their benefit, allowing them to
increase the clarity, accuracy and usefulness of the collected data.
Regulators Should Provide Appropriate Oversight and Commitment to
Market Participants So They Can Develop Industry-Based
Solutions
ISDA continues its efforts to drive data standardization, including
through its Symbology project \6\ to create an open source standard for
derivatives product identification that works for pre-trade, trading
and post-trade workflows. We encourage the participation of regulators
in industry initiatives and feel strongly that an open and regular
dialogue between regulators, industry associations like ISDA, and
market participants will expedite the development and implementation of
global data standards.
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\[6]\ [http://www2.isda.org/functional-areas/symbology/.]
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Regulators Must Be Specific When Developing Data Standards
Contrary to the approach of all other global regulators, both the
CFTC and SEC include requirements in their trade reporting rules to
provide data for which the Commissions have not explicitly specified
the trade terms required to be reported. Since data cannot be reported
electronically to a trade repository if the set of data fields are not
supported, these catch-all buckets leave trade repositories and the
industry to assess what data must be reported to comply with a
requirement for, for instance, ``any other term(s) of the trade matched
or affirmed by the counterparties in verifying the trade'' \7\ or ``any
other data elements . . . that are necessary for a person to determine
the market value of the transaction.'' \8\
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\7\ Appendix 1 to CFTC Part 45 regulation.
\8\ 242.901(d)(5) of SEC's Regulation SBSR--Reporting and
Dissemination of Security-Based Swap Information.
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Some derivatives products are highly standardized and it may be
possible to determine a uniform set of data fields that could apply in
these cases, but some derivatives are customized and a finite list of
potential data elements and values cannot be determined. Either way,
any differences in interpretations between trade repositories and
reporting entities regarding these unspecified requirements will reduce
the quality of the data. ISDA has consistently urged the Commissions to
explicitly define their data requirements as determined by the way in
which they intend to assess the data, rather than allocate such
decisions to trade repositories and market participants.
3. Domestic Regulators Should Align on Data Rules
The reporting regulations of the CFTC and SEC are different,
including the data this is reportable and the parameters to determine
which trades are subject to reporting. Considering that the Commissions
have issued these rules in response to their obligations under the same
piece of legislation, the Dodd-Frank Act, the rationale for the
divergence in their rules is difficult to comprehend.
For instance, it is illogical that each Commission should have a
different definition for who is a U.S. Person, and as a result, a
divergent position as to which transactions pose risk to U.S. markets
and, thus, are subject to reporting. Based on their divergent
definitions, it is possible that a particular counterparty may only be
required to report either its swaps or its security-based swaps. The
Commissions should be expected to agree on a single definition for U.S.
Person and a uniform approach to their requirements for reporting of
cross-border swaps and security-based swaps, which carefully considers
whether the derivatives transactions of parties that are not domiciled
in the U.S. pose a genuine risk to the U.S. markets that cannot be
mitigated by the oversight of the relevant foreign regulator(s).
The artificial line between swaps and security-based swaps is
unique to the U.S. and undermines the ability of the CFTC and SEC to
aggregate their data and provide Congress with a holistic view of the
risk in the U.S. derivatives market. Other regimes look at the
derivatives market holistically and within the same jurisdiction have
not issued different trade reporting regulations and different data
fields for segments of the derivatives market (aside from those that
are appropriate to a particular asset class). For example, in Canada,
there are 13 securities regulators, each with its own securities
legislation and independent oversight of the trading activity in its
province or territory. Despite having separate trade reporting
regulations, these authorities managed to agree to a defined, uniform
list of data fields.
In contrast, the SEC and CFTC recently issued concurrent but
separate consultations on data standards for their respective reporting
regulations. They took entirely different approaches to addressing the
matter. In accordance with long-standing suggestions from ISDA and the
industry, the SEC has proposed a rule requiring security-based swap
data repositories to provide data to them using existing data standards
such as FpML, which is the open source XML standard for electronic
dealing and processing of OTC derivatives. Meanwhile, the CFTC has
created its own trade terminology, definitions and allowable values
which are not fully harmonized with either existing industry standards
or the proposal of the SEC.
4. Reporting Requirements Should Be Rationalized and Streamlined
More Data Is Not Better Data
There is a regulatory misconception that collecting more data will
better inform an understanding of market risk. However, requiring
dozens of data fields for a single transaction significantly
complicates the ability to analyze trade data and meaningfully assess
market risk by overloading databases with transaction terms that are
not pertinent to a distinction of risk. For instance, whether payments
are calculated taking into account New York business days vs. London
business days or knowing which version of an ISDA Master Agreement was
executed between the parties will not lead to any opportunities to
mitigate risk. Rather, reporting of non-essential data fields, many of
which are not agreed as part of the swap execution, makes it harder for
regulators to focus on the key economics of the transactions that are
relevant to price transparency or an understanding of the risk of the
transaction. Instead of collecting vast amounts of data for which the
value and application of each field toward systemic risk analysis is
undetermined, the regulators should look at their desired end-state and
work backward to ensure the right data is collected that meets a well-
considered approach to global risk analysis.
In order to focus on meeting their primary objective to mitigate
market risk, the Commissions should focus on obtaining a restrained,
defined set of globally consistent core economic data fields that allow
them to analyze the concentration of risk in certain products, against
certain underliers or by certain market participants.
Placing Reporting Burden on End-Users
The U.S. was the first to implement a single-sided reporting model
under which one party is responsible for reporting the data to a swap,
and rightfully placing the bulk of the cost, burden and liability for
reporting on more sophisticated market participants. However, despite
the obvious benefits, the U.S. is not a truly single-sided reporting
regime. Rather, due to the requirement placed on SDRs by the Dodd-Frank
Act to confirm the accuracy of reported data with both counterparties,
SDRs are required to build functionality for non-reporting parties and
to supplement or verify the reported data.
This requirement in the Dodd-Frank Act replicates the bilateral
confirmation process and places an indirect obligation on all parties
to reportable derivatives transactions in the U.S. to onboard to all
SDRs used by their counterparties and build the associated
functionality required by each SDR. This is dual-sided reporting in
disguise, placing an enormous and costly burden on end-users to build
functionality that does not actually improve the quality of the data.
Dual-sided reporting in the European Union has not resulted in better
data quality and these variations of duplicative reporting obligations
in the U.S. will not either. Instead, the reporting party should be
solely accountable for the accuracy of the data it reports to an SDR.
Summary
The goal of improved regulatory transparency in the derivatives
market is an important one, and it is one that ISDA fully supports.
In order to improve the quality of the data available to the
regulators to meet their G20 commitments for transparency and risk
mitigation, the industry needs global regulators to:
Improve data quality by adopting a defined set of core
economic data fields that:
are relevant to the primary objectives of trade
reporting;
are domestically and globally harmonized in accordance
with the recommendations of CPMI-IOSCO;
align with existing industry defined terminology
(i.e., product definitions published by ISDA); and
leverage existing derivatives messaging standards,
like FpML.
Allow a single reporting counterparty to be solely
responsible for the accuracy of the reported data.
Rather than issuing their own proposals for changes and the
expansion of their data reporting regulations, the Commissions should
focus on improving data under their existing regulations by providing
the clarity and improvements requested and suggested by the industry.
Significant changes to the data fields should only be implemented in
accordance with the recommendations of the CPMI-IOSCO Data
Harmonisation Group. The recommendations of that forum are expected to
be completed in 2017; U.S. regulators should contribute to the
expedition of those efforts and not engage in further overlapping and
potentially contradictory data proposals.
The Chairman. Ms. Collazo?
STATEMENT OF MARISOL COLLAZO, J.D., MANAGING
DIRECTOR AND CHIEF EXECUTIVE OFFICER OF DTCC DATA REPOSITORY,
DEPOSITORY TRUST AND CLEARING
CORPORATION, NEW YORK, NY
Ms. Collazo. Thank you, Chairman Scott, Ranking Member
Scott, and Members of the Subcommittee. I am Marisol Collazo,
Managing Director at DTCC and Chief Executive Officer of the
DTCC's Swap Data Repository. I appreciate the opportunity to
share my perspective on the current status of swaps data
reporting.
In 2009, G20 leaders, committed to making the global OTC
derivatives market safer and more transparent. This
transparency will assist regulators globally to monitor
systemic risk forming in the swaps market. Swap data
repositories, or SDRs, emerged as a way to achieve this goal.
Since then, progress has been made and trade reporting
regimes are in place across all major jurisdictions. Today,
authorities have access to more data than ever before. In the
United States, we process 80 million messages a week or more
than four billion messages a year.
In order to assess the effectiveness of trade reporting, we
must refer back to the two goals of the G20 mandate: First, to
provide transparency into opaque markets; and second, for
regulators to utilize such transparency to identify and
anticipate potential systemic risk.
There are aspects of the data being reported today that are
useful to both the CFTC and the public at large. For example,
public price transparency is now reported on a real-time basis.
This provides a window into a market that was previously
opaque. From this data, the CFTC can see volumes and the number
of transactions executed daily. Further, the CFTC has an even
deeper view of reported data that can be used for surveillance
and other regulatory purposes.
Now let's turn to the challenges that remain. Given that
the swaps market is inherently cross-border, in order to fully
maximize the usefulness of the data reported to SDRs, a
globally consistent framework for standardization and
governance are needed. Today, unfortunately, inconsistent
reporting requirements amongst various jurisdictions are
hindering this ability. Global data harmonization and
regulatory access to data remain a challenge. DTCC applauds
Congress for removing the Dodd-Frank's indemnification
provision. However, more work remains. These challenges must be
resolved before regulators can effectively aggregate data and
determine the systemic risk profile of a global swap dealer.
Based on DTCC's experience, supporting regulatory reporting
across nine jurisdictions, we have seen divergent requirements
even within the same data elements. This variance has
negatively impacted data quality and increased complexity.
Instead, we recommend that regulators agree to a standard
approach for reporting the core terms of the swap across
jurisdictions. Such global consistency will facilitate efforts
by regulators to share and aggregate data, allowing for a more
complete and harmonized view of the OTC derivatives market.
The CFTC recently issued a request for comment on technical
specifications for the reporting of certain data elements. DTCC
strongly encourages the CFTC to recognize existing market
convention in its effort to improve currently reported data.
The CFTC should carefully consider if any proposed changes
significantly add value or if they inject unintended complexity
into the current reporting system.
We also encourage the CFTC to align with policy-making
efforts underway globally such as those spearheaded by CPMI-
IOSCO to establish consistent data standards. For example, much
progress has been made on establishing a recommended standard
for product and transaction identifiers. We look forward to the
remaining work that CPMI-IOSCO will take on for other key data
elements.
Another important step is the establishment of a governance
framework to facilitate management of this global data set and
regulatory access to data. This framework will help ensure that
standards are maintained and updated as markets evolve.
In conclusion, the priorities I have outlined will assist
in realizing the G20 goals of market transparency and systemic
risk oversight. We believe that Congress must ensure regulators
remain focused on implementing such framework as I have
described. Thank you, Mr. Chairman, for the opportunity to
present and participate in today's hearing, and I look forward
to your questions.
[The prepared statement of Ms. Collazo follows:]
Prepared Statement of Marisol Collazo, J.D., Managing Director and
Chief Executive Officer of DTCC Data Repository, Depository Trust and
Clearing Corporation, New York, NY
Chairman Scott, Ranking Member Scott, and Members of the
Subcommittee, thank you for holding today's hearing to discuss the
Group of 20 (``G20'') swap data reporting goals.
I am Marisol Collazo, Managing Director at The Depository Trust &
Clearing Corporation (``DTCC'') and Chief Executive Officer of the DTCC
Data Repository (U.S.) LLC, (``DDR''). I appreciate the opportunity to
share DTCC's perspective on the current status of data reporting of
swaps around the globe, and equally appreciate the Committee's
continued attention to the topic.
At its core, DTCC develops and harnesses technology to provide a
variety of risk management and data services to the financial services
industry. More than 40 years ago the firm was born largely out of the
need to leverage technology and automation in order to ensure
securities transactions were more efficiently settled, thereby reducing
risk of loss in the event of a counterparty default. In this respect,
DTCC presently is among the more established financial technology or
``fintech'' companies.
Today, DTCC continues to deploy evolving and improving technology
in service to its mission as the primary financial market
infrastructure for the securities industry.\1\ DTCC simplifies the
complexities of clearing, settlement, asset servicing, data management
and information services across multiple asset classes. In 2014, DTCC's
subsidiaries processed securities transactions valued at approximately
U.S.$1.6 quadrillion.\2\
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\1\ DTCC provides critical infrastructure to serve all participants
in the financial industry, including investors, commercial end-users,
broker-dealers, banks, insurance carriers, and mutual funds, and
continually considers and examines new technologies to perform these
services. See, for example, DTCC White Paper, ``Embracing Disruption--
Tapping the Potential of Distributed Ledgers to Improve the Post-Trade
Landscape'' (January 2016), available at http://dtcc.com/news/2016/
january/25/blockchain-white-paper.
\2\ DTCC's U.S. clearing and depository subsidiaries were
designated as Systemically Important Financial Market Utilities
(``SIFMUs'') in 2012 by the Financial Stability Oversight Council
(``FSOC'') pursuant to Title VIII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (``Dodd-Frank'').
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DTCC's Global Trade Repository
DTCC provides services for a significant portion of the global
over-the-counter (``OTC'') derivatives market and has extensive
experience operating repositories to support derivatives trade
reporting and enhance market transparency.
DTCC's Global Trade Repository (``GTR'') service supports reporting
across all five major derivatives asset classes--credit, interest rate,
equity, foreign exchange and commodity--and exchange traded derivatives
in nine jurisdictions across 33 countries. Despite differences in local
reporting requirements across regions, DTCC has built a robust and
flexible infrastructure with three fully replicated data centers. This
global reporting service was created in response to the G20 commitment
regarding swap data reporting, explained in more detail later in this
testimony.
DDR received provisional registration from the Commodity Futures
Trading Commission (``CFTC'') to operate a multi-asset class swap data
repository for OTC credit, equity, interest rate, foreign exchange and
commodity derivatives in the U.S. DDR is the only repository to offer
reporting across all asset classes--a significant milestone in meeting
regulatory calls for robust trade reporting and risk mitigation in the
global OTC derivatives market. DTCC, through its Trade Information
Warehouse (``TIW'') service, has provided public aggregate information
for the credit default swap (``CDS'') market on a weekly basis since
January 2009. This information is available, free of charge, on
www.dtcc.com.
While domestic authorities were developing mandatory reporting
frameworks, in 2010, DTCC implemented a voluntary reporting framework
under OTC Derivatives Regulators Forum (``ODRF'') data access
guidelines. This framework leveraged TIW, which contains the vast
majority of credit derivative trades transacted globally. A portal was
established to provide detailed data on voluntarily-reported
transactions to more than 40 supervisors globally. The portal allows
for regulators to access data within their mandate and information
provided is consistent with ODRF data-sharing guidelines. The portal
assists regulators in their supervisory capacities in scenarios such as
sovereign debt crises, corporate failures, credit downgrades and
significant losses by financial institutions.
The 2008 financial crisis highlighted the ability of TIW to provide
an unprecedented degree of transparency into an opaque market. In the
aftermath of the Lehman bankruptcy, rumors circulated that potential
liabilities for CDS trades on outstanding Lehman obligations could top
$400 billion based on estimates of the outstanding notionals (or value)
of the trades. Regulators worked closely with DTCC to analyze data from
TIW to obtain a better understanding of market exposures to the Lehman
bankruptcy. This data revealed that the actual net liabilities would be
approximately $6 billion, far less than the market anticipated, which
helped calm the market.
Progress Made on Regulatory and Public Reporting of Swaps-Transaction
Data
In 2009, G20 leaders committed to making the global OTC derivatives
markets safer and more transparent, and to create tools for the
supervision of global market participants.\3\ In particular, trade
repositories--also known as swap data repositories (``SDRs'') under
Dodd-Frank--emerged as a means to provide transparency into this
previously opaque marketplace through the collection and maintenance of
OTC derivatives data.
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\3\ See G20 Leaders' Statement at the Pittsburgh Summit (Sept.
2009), available at http://www.treasury.gov/resource-center/
international/g7-20/Documents/pittsburgh_summit_
leaders_statement_250909.pdf.
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Since 2009, regulators and the industry have made significant
strides in addressing the data gap that existed during the financial
crisis. Trade reporting regimes are now in place across jurisdictions
globally that host major derivative markets and authorities within
those jurisdictions have access to more data than ever before, which is
critical to market surveillance and the identification of counterparty
risk.\4\ According to the Financial Stability Board's (``FSB'') Tenth
Progress Report on Implementation of OTC Derivatives Market Reforms,
there are currently 20 authorized trade repositories operating across
12 jurisdictions, while government authorities or other trade
repository-like entities are collecting OTC derivatives transaction
reports in an additional six jurisdictions.
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\4\ For example, CFTC Chairman Timothy Massad stated that swaps
data is improving the Commission's ability to oversee the marketplace.
See CFTC Chairman Timothy Massad, Keynote Remarks before the Futures
Industry Association Futures and Options Expo (Nov. 4, 2015), available
at http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-33.
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Notwithstanding the fact that trade repositories are now receiving
and reporting data to authorities as well as the public, there remain
two key questions: (1) how useful that information is; and (2) whether
the regulatory reporting of that data by trade repositories is
achieving the G20 mandate.
Regarding the first question, there is a significant amount of
post-trade data collected by trade repositories and reported to
regulators and the public in real time. For example, DDR currently
holds approximately ten million CFTC-reported open derivatives trades.
DDR began publishing trade data to the CFTC on October 12, 2012, the
first day that mandated trade reporting began under Dodd-Frank and on
December 31, 2012, DDR began publishing real-time price information.
Reports are publicly available through slice files, RSS feeds and
Internet access to a ticker page, Excel and search functions on DDR's
website, https://rtdata.dtcc.com/gtr/dashboard.do.
Through information provided by DDR, the CFTC currently is able to
see volume in the OTC derivatives marketplace and can identify the
number of transactions executed every day.
Additionally, all positions and activity are visible, which creates
an end-of-day inventory of the market. For regulators, real time access
to trade data provides a deeper view into derivatives pricing, and in
raw form, allows for analysis that could be used for surveillance and
other purposes. As transactions are being executed, regulators and the
public can now see derivatives contracts pricing levels that previously
had not been visible.
From a U.S. point of view, the ability of a domestic supervisor to
assess the systemic risk of a firm managing swap-book risk through the
data reported by an SDR should be significant, for the foregoing
reasons. Equally relevant is the fact that the vast majority of
interest rate swaps and CDS are either cleared by a clearinghouse and/
or otherwise confirmed through an automated system. These processes
provide for a substantial level of standardization of the terms of the
swaps contracts, allowing for and facilitating more complete, valid and
accurate regulatory reporting by an SDR. However, a large percentage of
swaps outside these asset classes are not cleared or confirmed through
automation.
When a swap is neither cleared nor confirmed through automation,
the completeness, validity and accuracy of reporting tends to erode due
to the fact that the swap is likely bespoke in nature (thus containing
a number of unique characteristics and attendant data fields for
reporting).
Bespoke swaps are less suitable to harmonization for purposes of
data reporting, and as a result, data on those swaps is often more
difficult to analyze efficiently. The nature of such bilateral swaps,
which often are hedge instruments, means there will always be a
percentage of trades that will not be cleared or confirmed.
Remaining Challenges to Realizing Vision of G20 and Dodd-Frank
The answer to the second key question--whether the goals of the G20
mandate are being realized--is less clear, as discussed below. True
systemic-risk monitoring and analysis by a U.S. supervisor, through use
of SDR-reported data, becomes more challenging when it requires
reliance on data of a large institution's swap exposure outside the
U.S.
The marketplace for swaps is global and dealers (and others) who
make markets in swaps for their customers usually have a global
footprint through a variety of branches, affiliates and subsidiaries
located around the world. Each global swap dealer is structured
differently, but the swaps positions entered into by one branch,
affiliate or subsidiary of a global financial institution oftentimes
will be transferred or aggregated on the books of one, or perhaps
several, legal entities within the corporate and legal structure of
that global swap dealer.
This context is important to understanding why global data
harmonization is critical for purposes of monitoring the systemic risk
profile of market participants by any one regulatory supervisor. To
understand the risk profile of a systemically important institution, a
regulator needs to see and understand the risk exposure of that
institution based on swap positions it has entered into around the
globe. If, for instance, the CFTC, which supervises a registered U.S.
swap dealer, only sees the swap positions on the books of that legal
entity but not the positions on the books of affiliated, non-U.S.
entities outside the jurisdictional scope of the CFTC, it will not
fully understand the level and breadth of risk that the swap dealer
might be exposed to.
Ideally, the CFTC or Securities and Exchange Commission (``SEC'')
would be able to access not only U.S. SDR data but data from non-U.S.
trade repositories as well in order to understand the risk that
entities affiliated with a registered U.S. swap dealer are managing.
This would afford a regulator the ability to aggregate and transform
data from multiple trade repositories into meaningful analytical
information.
Inconsistent Reporting Requirements and Data Quality
In November 2015, the FSB published its Thematic Review on OTC
Derivatives Trade Reporting, which noted that although the majority of
FSB member jurisdictions have introduced trade reporting obligations,
the usefulness of this data is being limited by data quality issues,
including the formatting, completeness and accuracy of the data.
Despite the G20's common commitment to trade reporting, the
derivative reporting regimes that emerged following the financial
crisis differed along national lines, creating inconsistent sets of
reporting requirements globally. This makes it more challenging to
standardize, access, share and aggregate data on a global scale.
Even within the U.S. domestic market, there are disparities in the
reporting regimes established by the CFTC and SEC. For example, SEC
requirements for security-based SDRs include the reporting of new
identifiers and collection of data from non-reporting sides, both of
which are not required by the CFTC. Requiring information not relevant
to understanding the key economic characteristics of the reported trade
introduces complexities in data aggregation, creates additional
opportunities for reporting errors and unnecessarily increases the
costs of reporting by both reporting parties and trade repositories. In
addition, requiring the same information, but in different formats,
causes inefficiencies interpreting data due to the inherent need to
reconcile data reported in differing ways.
Obstacles to Data Access
The FSB also identified barriers to domestic and foreign
authorities' access to data held in trade repositories as a key
finding, specifically identifying the indemnification provisions of the
Dodd-Frank Act.
DTCC appreciates the efforts of Congress, the CFTC and the SEC to
address and resolve issues concerning data reporting. DTCC has long
been a vocal advocate of legislation to repeal the Dodd-Frank
indemnification provisions and applauds Congress and the Administration
for its passage of Public Law 114-94 (http://api.fdsys.gov/
link?collection=plaw&congress=114&lawtype=public&
lawnum=94&link-type=html), the Surface Transportation
Reauthorization and Reform Act of 2015, which, among other things,
eliminated the indemnification requirement.
Removal of these provisions is an important step to achieving the
transparency goals established by the G20, but additional work is
needed to further provide global and domestic regulators with
appropriate access to high-quality standardized data critical to market
surveillance and systemic risk oversight.
Necessary Next Steps to Achieving G20's Goals
There are several continuing steps policymakers must take to fully
realize the G20 goal of enhanced transparency into the OTC derivatives
market:
1. Accelerate data standardization and aggregation;
2. Establish a global data access and governance framework; and
3. Drive global adoption and consistent implementation of the above
efforts.
1. Accelerating Data Harmonization To Improve Data Quality
Data quality consists of three components: completeness, validity
and accuracy. Completeness refers to the presence or absence of data in
a field. Validity refers to a data element being submitted in
accordance with the validation rules of an SDR, which have been
developed according to relevant regulation in a jurisdiction. Accuracy
refers to whether the SDR data accurately reflects the swap transaction
terms.
Data completeness is a precondition to determining whether the
submitted data is valid and accurate. Data validation, which may be
controlled by establishing a set of basic quality checks such as proper
type of data, helps to facilitate meaningful reconciliation, which is
the key mechanism to confirm the accuracy of the SDR data.
Without harmonized regulatory reporting requirements--both
domestically and internationally--each one of the components above is
more likely to be impaired in the following ways.
First, requiring more data elements than necessary to understand
the key economic characteristics of a swap creates greater odds that
the quality of the data will be reduced and potentially cause
misinterpretation of the data. Based on DTCC's experience supporting
regulatory reporting across nine jurisdictions, we have seen firsthand
how regulators have implemented varying reporting regimes with
different requirements, fields and definitions. For example, due to the
current wide range of reporting fields required by regulators globally,
DTCC supports reporting for a total of nearly 3,000 data elements
globally. Global regulators should coalesce around a common core set of
necessary data elements.
Second, requiring different data elements among different
jurisdictions increases the likelihood of error by reporting entities.
Instead, global regulators should agree to and only require reporting
of harmonized core terms of the swap, and require the data elements
used to reflect those terms to be the same across jurisdictions.
These actions would have the effect of facilitating efforts by
regulators to share and aggregate data, thus providing the requisite
jurisdictional as well as global view of the OTC derivatives market.
Addressing the remaining legal barriers to data sharing--some of which
predate derivatives reform such as blocking statutes, state secrecy
laws and bank secrecy laws--requires international regulatory
cooperation.
Domestic Efforts
The CFTC has taken steps to improve data quality, including its
recent request for comment on draft technical specifications for
certain swap data elements. Rather than introduce new data elements as
the CFTC proposes, DTCC encourages the CFTC to: (1) focus on improving
the quality of existing key elements and adhere to current market
conventions; (2) work towards global consistency by aligning its
efforts with international policymaking efforts underway, such as those
spearheaded by the Committee on Payments and Market Infrastructures
(``CPMI'') and the International Organization of Securities Commissions
(``IOSCO''); and (3) carefully consider whether the proposed changes
inject operational and functional complexity into the current reporting
system.
Notwithstanding the steps taken by the CFTC and the SEC to improve
swap data reporting, additional coordination is needed to address
challenges that have emerged from divergent regulations. For example,
the SEC proposed requiring the reporting of trade and desk identifiers
whereas the CFTC does not require those elements to be reported. In
addition, there is a lack of consistency among the CFTC and SEC as to
the reporting of product identifiers.
Global Efforts
The harmonization of OTC derivatives reporting must take place at
the global level as well. Currently, significant disparities exist
between reporting requirements in various jurisdictions. For example,
in the European Union, the European Securities and Markets Authority
(``ESMA'') mandates that a reporting field include a Unique Trade
Identifier, or ``UTI.'' The CFTC, on the other hand, mandates the use
of the Unique Swap Identifier, or ``USI,'' as a data standard for
reporting by registered SDRs. These unique fields attempt to address
the same issue of identifying a swap transaction, but essentially are
using two different standards to do so.
DTCC is encouraged by recent international efforts to establish
consistent standards. CPMI-IOSCO has been charged with spearheading
global data harmonization efforts, and recent efforts to standardize
identifiers such as the unique product identifier (``UPI'') and UTI are
significant steps.
In June 2015, DTCC provided recommendations to the CPMI-IOSCO
Harmonization Working Group, detailing a proposed path towards global
data harmonization with credit derivatives identified as the first
step.\5\ The approach involves harmonizing approximately 30 data fields
across global trade repository providers, essentially creating a global
data dictionary. These fields are viewed as critical to financial
stability and systemic risk analysis. DTCC also provided comments in
response to recent consultative reports regarding harmonization of key
data elements, including the UTI and CPMI-IOSCO's consultation on
harmonization of the UPI as well.
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\5\ See Press Release, DTCC Proposal to CPMI-IOSCO on Global Data
Harmonization (June 18, 2015), available at http://www.dtcc.com/news/
2015/june/18/dtcc-proposal-to-harmonization-working-group.aspx.
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While recent efforts are steps in the right direction, increased
and consistent active dialogue is critical to resolve jurisdictional
differences. This will require ongoing global coordination and
collaboration in addition to a dedicated commitment by regulators and
the industry.
Global Markets Entity Identifier Utility
A key element in enhancing transparency is the global adoption of
identifiers and consistent standards to provide for effective data
aggregation. To this end, DTCC is actively engaged in the global effort
regarding legal entity identifiers (``LEI''), which allow for the
unique identification of legally distinct entities that are
counterparties on financial transactions. As noted by U.S. and
regulators globally, the FSB, and industry trade associations, global
LEI adoption will enable improved systemic risk analysis.
DTCC's Global Markets Entity Identifier (GMEI)--a utility operated
in collaboration with SWIFT--has assigned LEIs to more than 200,000
legal entities to date across more than 140 jurisdictions, representing
approximately 50 percent of all global LEIs that have been assigned.\6\
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\6\ Through a competitive process, DTCC was chosen to build and
operate an LEI utility for the industry and was designated by the CFTC
to provide LEIs to swap market participants as required by CFTC record-
keeping and reporting rules. This utility, which DTCC operates with
SWIFT, is the GMEI utility and has been globally endorsed by the
Regulatory Oversight Committee (ROC), which oversees the Global LEI
System (GLEIS).
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Domestic and international regulators have considered the benefits
of adopting a global system for legal entity identification and
recognize the importance of such a system to various financial
stability objectives. In fact, several regulatory authorities have
promulgated record-keeping and reporting rules with respect to OTC
derivatives transactions that require counterparties to be identified
by LEIs.\7\ DTCC strongly supports industry and regulatory efforts to
mandate the use of the LEI in relevant rulemakings.
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\7\ The CFTC, SEC, ESMA, the Monetary Authority of Singapore
(``MAS''), the Hong Kong Monetary Authority (``HKMA''), the Australian
Securities and Investment Commission (``ASIC''), and the Ontario
Securities Commission (``OSC'') each mandate use of LEI. ESMA recently
included an LEI requirement in their technical standards for compliance
with MiFIR/MiFID II.
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While many jurisdictions accept LEIs, not all have mandated their
use and some permit the masking of a financial institution's identity
due to legal concerns regarding privacy laws. DTCC believes that the
LEI standard should be extended across jurisdictions. Extension of LEIs
to support branch location and the parentage information to enable
aggregation by grouping all legal entities to one parent has begun and
should continue under the auspices of the Global Legal Entity
Foundation, a foundation created by global regulators to operate the
LEI system.
2. Establishing a Global Data Access & Governance Framework
A data access and governance framework is urgently needed to truly
effectuate the goal of global data harmonization. This will help ensure
that data standards are maintained and updated as markets and
regulatory requirement evolve, while also providing a formal structure
for the appropriate sharing of and access to data across jurisdictions
for systemic risk oversight.
Financial data standards are not static. As such, guidance is
needed to restrict how and when the global data set and its associated
data dictionary can be changed. A consistent and predictable approach
to changing the composition of the data elements in the global data set
and the timing of such changes must also be adopted. In doing so,
certainty will be provided to the industry, trade repositories and
regulators that there is consistency across regulatory regimes from
ingestion of the data to its reporting to regulators.
For example, currently there is no predictable cycle to the review
and revision of regulatory reporting requirements which makes planning
for changes by both reporting parties and trade repositories virtually
impossible. Likewise, the need for a sufficient amount of lead time
prior to implementation of any changes to reporting must be recognized;
at present the lead time to implementation varies from jurisdiction to
jurisdiction.
Implementation efforts are rarely synchronized, causing redundant
development on one side when there are serial changes and resource
conflicts on the other when implementations overlap. A coordinated
approach to implementation would alleviate those problems, improving
regulatory and legal certainty, boosting market efficiency and
lessening the cost of compliance for market participants and
infrastructure service providers.
Further, the governance framework must concurrently provide the
formal structure and conditions upon which regulators could access each
other's data, particularly now that legislative hurdles such as Dodd-
Frank's indemnification provisions have been removed. Consistent with
this approach, in its 2015 Thematic Review, the FSB issued a
recommendation that by ``June 2018 at the latest all jurisdictions
should have a legal framework in place to permit access to data held in
a domestic [Trade Repository] by domestic authorities and by foreign
authorities, on the basis of these authorities' mandates and in
accordance with domestic regulatory regime.'' \8\
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\8\ FSB Thematic Review on OTC Derivatives Trade Reporting: Peer
Review Report, 4 November 2015.
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DTCC applauds the SEC for quickly recommending a revision of its
Proposed Rules on Access to Data Obtained by Security-Based Swap Data
Repositories and Exemption from Indemnification Requirement to take
into account the legislative repeal of the indemnification provisions.
We encourage the SEC and the CFTC to consider CPMI-IOSCO's Guidance on
Authorities access to trade repository in the development of their
respective data access rules.
Important precedents exist at a multi-lateral level which show that
regulatory cooperation can make cross-border data sharing possible.
DTCC's TIW provided authorities access to data on CDS transactions
pursuant to guidance issued by the ODRF, which defined the parameters
of information that could be disclosed based on parties to the
transaction and the underlying reference entity on whom credit
protection was being bought or sold. The credit derivatives data
provided was standardized, aggregated and shared across jurisdictions.
The ODRF example demonstrates that existing infrastructures can be
leveraged to perform the aggregation of OTC derivatives data, provided
the relevant supervisory authorities agree on a governance layer. For
aggregation to work, as demonstrated in the credit derivatives markets,
consistent data with very clear access rules is essential.
DTCC believes that the FSB, in conjunction with CPMI-IOSCO, is best
positioned to identify and commission a neutral college of regulators
to establish a global governance framework. This group would support
maintenance of global data standards and appropriate data sharing. A
governance framework would also establish the foundation and necessary
structure to enable global supervisors such as the FSB and CPMI-IOSCO
to develop their guidance for data standards and harmonization.
3. Ensuring Global Adoption and Implementation
Once guidance on data standards is agreed upon and a governance
framework is established, a challenging but critical final step is for
policymakers to ensure that these efforts are adhered to and
implemented globally.
Ideally, a single standard setting authority should be responsible
for monitoring the adoption of standards in domestic rulemaking and
compliance with those rules as well as outcomes. This is a proven three
level process which has been successfully adopted by the Basel
Committee and CPMI on monitoring the implementation of the Principles
for Financial Market Infrastructures, and could be extended in scope to
create the necessary conditions for the consistent adoption of global
data standards and the corresponding governance framework.
Without consistent adoption at the domestic rulemaking level, many
of the obstacles complicating efforts to achieve cross-border data
harmonization for market transparency purposes will remain unaddressed.
G20 leaders can support these efforts by continuing to address legal
barriers to data access and mandating that jurisdictions adopt and
adhere to these principles within a specific timeframe. DTCC
appreciates the FSB's recent recommendation referred to above that all
jurisdictions should have a legal framework in place by 2018 to address
access to data by domestic and foreign authorities, on the basis of
these authorities' mandates and in accordance with the domestic
regulatory regime.\9\
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\9\ FSB Thematic Review on OTC Derivatives Trade Reporting: Peer
Review Report, 4 November 2015.
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Given the global nature of OTC derivatives markets, global
coordination is essential. Congress can play a pivotal role in these
efforts by strongly encouraging regulators to address key issues
surrounding data harmonization and data sharing globally. DTCC stands
ready to assist and looks forward to continuing work with U.S.
policymakers, regulatory bodies globally and industry participants to
strengthen the global derivatives marketplace.
Conclusion
Mr. Chairman, Ranking Member, thank you for inviting me to speak
today on this important topic. As you know, access to high quality,
aggregated data is necessary to assist in safeguarding the markets and
in protecting our economy. I will be happy to answer any questions and
look forward to a continued dialogue with you and your staffs.
The Chairman. Thank you, ma'am. Mr. Gil?
STATEMENT OF ANDRES GIL, DIRECTOR, CENTER FOR
CAPITAL MARKETS COMPETITIVENESS; REPRESENTATIVE, COALITION FOR
DERIVATIVES END-USERS, WASHINGTON, D.C.
Mr. Gil. Thank you. Mr. Chairman, Ranking Member Scott,
other Members of the Subcommittee for the opportunity to
testify at this hearing to review the G20 swap data reporting
goals.
My name is Andres Gil, and I am testifying on behalf of the
U.S. Chamber of Commerce and the Coalition for Derivatives End-
Users. The Chamber is the world's largest business federation,
representing the interests of more than three million
businesses of all sizes, sectors, and regions. The Coalition
includes more than 300 end-user companies and trade
associations. Collectively, the Chamber and the Coalition
represent a wide and diverse population of domestic and
international commercial businesses and trade associations.
At the outset, let me thank the Members of this
Subcommittee for their focus on balancing regulations, to
promote financial stability, and for Main Street businesses to
have the tools necessary to operate and grow as well as the
CFTC for listening to the concerns of end-users and for
creating a data-reporting regime that is both robust and
sensible.
The Chamber believes in America's global leadership in
capital formation and supports capital markets that are the
most fair, transparent, efficient, and innovative in the world.
As part of that mission, we recognize the acute need for
commercial end-users to effectively manage risks. This should
be consistent with financial regulatory measures that promote
economic stability and transparency without imposing undue
burdens on derivatives end-users.
With that background in mind, we support and believe in the
G20 swap data reporting goals including improving transparency
in derivatives markets, mitigating systemic risk, and
preventing market abuse. But there are real economic
consequences of getting derivatives regulation wrong. Main
Street businesses use derivatives to obtain access to raw
materials, lock in prices for commodities, and mitigate risk.
Many U.S. companies are able to maintain more stable and
successful operations through the use of a variety of risk
management tools, including derivatives. Smart regulation
should encourage, not discourage, such practices.
However, implementation of the G20 goals has begun to hurt
end-users. For example, the European Union appears to be
proceeding without due regard for the economic and regulatory
burdens imposed on end-users by certain swap data reporting
obligations. These include dual-sided reporting and
interaffiliate obligations which require end-users to adopt
costly new reporting systems to comply with EU law. Both
requirements impose significant initial and ongoing
operational, legal, and cost burdens for end-user companies.
We suggest that there must be a better way for regulators
and the market to get the data they need without imposing
duplicative and burdensome regulations on real economy
companies, especially because they do nothing to promote the
goals of the G20 framework.
Ultimately, the Chamber and the Coalition believe that this
has resulted in a fragmented market where U.S. end-users
operating abroad now face compliance with multiple reporting
regimes and required data sets for their transactions.
The larger point, however, is that the cumulative effect of
new derivatives regulation threatens to impose undue burdens on
end-user hedging. Both the direct regulation of end-users, the
reporting requirements on which this hearing is focused, and
indirect regulation, such as capital and liquidity requirements
imposed on our counterparties serves to discourage end-user
risk management through hedging.
We need a regulatory system that allows Main Street to
effectively use derivatives to hedge commercial risk resulting
in key economic benefits, one that allows businesses to improve
their planning and forecasting, manage unforeseen and
uncontrollable events, offer more stable prices to consumers,
and contribute to economic growth. We should always aim to
avoid the imposition of unnecessary burdens on end-users that
restricts job growth, decreases investment, and undermines our
competitiveness abroad.
As the Subcommittee considers the implementation of G20
reporting obligations, it is our hope that these issues will be
at the forefront of your efforts. Continued support for global
standards, rather than proceeding on divergent paths, is
important for data reporting consistency. Congress has the
ability to influence that process by promoting harmonization
and sensitivity to the impacts on end-user companies. Together,
we can strengthen our financial systems by supporting Main
Street business.
Thank you, and I am happy to address any questions that you
may have.
[The prepared statement of Mr. Gil follows:]
Prepared Statement of Andres Gil, Director, Center for Capital Markets
Competitiveness; Representative, Coalition for Derivatives End-Users,
Washington, D.C.
The U.S. Chamber of Commerce is the world's largest business
federation representing the interests of more than three
million businesses of all sizes, sectors, and regions, as well
as state and local chambers and industry associations. The
Chamber is dedicated to promoting, protecting, and defending
America's free enterprise system.
More than 96% of Chamber member companies have fewer than 100
employees, and many of the nation's largest companies are also
active members. We are therefore cognizant not only of the
challenges facing smaller businesses, but also those facing the
business community at large.
Besides representing a cross section of the American business
community with respect to the number of employees, major
classifications of American business--e.g., manufacturing,
retailing, services, construction, wholesalers, and finance--
are represented. The Chamber has membership in all 50 states.
The Chamber's international reach is substantial as well. We
believe that global interdependence provides opportunities, not
threats. In addition to the American Chambers of Commerce
abroad, an increasing number of our members engage in the
export and import of both goods and services and have ongoing
investment activities. The Chamber favors strengthened
international competitiveness and opposes artificial U.S. and
foreign barriers to international business.
Mr. Chairman, Ranking Member Scott, other Members of the
Subcommittee, I want to thank you for inviting me to testify at this
important hearing, which focuses on matters of significant concern to
the end-user community. I am testifying today on behalf of both the
U.S. Chamber of Commerce (``Chamber'') and the Coalition for
Derivatives End-Users (``Coalition''). The Chamber is the world's
largest business federation, representing the interests of more than
three million businesses of all sizes, sectors, and regions. The
Coalition includes more than 300 end-user companies and trade
associations. Collectively, the Chamber and the Coalition represent a
wide and diverse population of domestic and international commercial
businesses and trade associations.
The Chamber's mission is to ensure America's global leadership in
capital formation by supporting robust capital markets that are the
most fair, transparent, efficient, and innovative in the world. As part
of that mission, the Chamber recognizes the acute need for commercial
end-users to effectively manage risk. Similarly, the Coalition,
representing the engines of our domestic and global economy, has
consistently supported financial regulatory measures that promote
economic stability and transparency without imposing undue burdens on
derivatives end-users; a sentiment with which I believe a consensus of
those in this room agree.
At the outset, let me thank the Members of this Subcommittee for
their focus on balancing regulations to promote financial stability and
for Main Street businesses to have the tools necessary to operate and
grow.
Main Street businesses use derivatives for their intended purpose--
obtaining access to raw materials, locking in prices for commodities
and mitigating risk--not for financial speculation. This allows
businesses to produce goods with stable prices for consumers.
Therefore, there are real economic consequences of getting derivatives
regulation wrong for Main Street businesses and the American consumer.
Many U.S. companies are able to maintain more stable and successful
operations through the use of a variety of risk management tools,
including derivatives. Smart regulation should encourage, not
discourage, such practices.
The Chamber and the Coalition have worked diligently to address the
regulatory burdens faced by commercial end-users, and that is why,
before I dive into the subject matter of this hearing, I would like to
thank the CFTC for listening to the concerns of end-users and for
creating a data reporting regime that is both robust and sensible.
Unfortunately, we cannot say the same for the G20 framework.
We are broadly supportive of the G20's swap data reporting goals,
including improving transparency in derivatives markets, mitigating
systemic risk, and preventing market abuse. However, as this
Subcommittee is aware, implementation of those G20 rules domestically
has begun to vary considerably. For example, the European Union
(``EU'') appears to be proceeding without due regard for the economic
and regulatory burdens imposed on end-users by certain swap data
reporting obligations. It is important to remember that these
obligations are being imposed on entities that do not pose systemic
risk and did not cause the financial crisis. Swap data reporting, at
its core, is largely driven by the need for transparency within the
derivatives markets. The theory is that, with transactional details,
regulators will be better equipped to assess market shortcomings and
better ensure financial stability. While that may be so, the real
question is what level of transaction detail is necessary, or even
helpful?
The EU, unlike the U.S., has implemented dual-sided and inter-
affiliate reporting requirements on end-users. Unfortunately, in many
circumstances these regulations are duplicative, costly and otherwise
detract from the risk mitigating nature of end-user derivatives.
Disparate treatment has resulted in a fragmented market where U.S. end-
users operating abroad now face compliance with multiple reporting
regimes and required data sets for their derivatives transactions.
Beyond the costly issues of compliance, the lack of consistency across
jurisdictions in a global market does not serve the G20 goals of
greater transparency, international harmonization, and systemic risk
reduction in the derivatives markets.
We understand that European policymakers believe that a dual-sided
reporting regime for derivatives transactions is appropriate in order
to reconcile certain circumstances in reporting errors and confirm the
integrity of reported data. However, we believe that adopting a dual-
sided reporting regime presents legitimate and significant costs on
end-users and should not be adopted without a thorough analysis of
whether dual-sided reporting presents any significant benefits to such
error reconciliation. This is especially true given that, in the United
States, regulators have access to accurate derivatives transaction data
through single-sided reporting, coupled with straight-through-
processing and the existing confirmation and reconciliation processes
employed by end-users and other market participants.
The CFTC and lawmakers have correctly recognized that the intrusive
nature of intragroup reporting--swap data reporting of transactions
among entities within a single end-user corporate structure--does not
serve to promote the goals of the G20 framework. Nor does it increase
systemic risk, either by creating counterparty credit risk or
increasing interconnectedness between financial institutions. The EU's
approach fails to substantively justify the need for information
related to the intra-corporate management of commercial risk--such
information has little or no value to regulators when compared to the
costs and operational burdens that end-users face in reporting such
transactions. Forcing end-users to comply with the same reporting
requirements for intragroup transactions as those required for external
derivatives transactions would simply burden end-users without any
corresponding benefit.
Finally, it is also worth noting that the EU has also included
futures markets in their reporting legislation. That inclusion is
outside of the G20 commitment and has proven to be highly burdensome
and costly for end-users. This is a particularly large issue given that
tools on collecting data from futures markets are already available to
European regulators.
The larger point, which I know this Subcommittee appreciates, is
that the cumulative effect of new derivatives regulation threatens to
impose undue burdens on end-user hedging. Both the direct regulation of
end-users through reporting requirements, on which this hearing is
focused, and indirect regulation, such as capital and liquidity
requirements imposed on our counterparties, serves to discourage end-
user risk management through hedging. We need a regulatory system that
allows Main Street to effectively use derivatives to hedge commercial
risk, resulting in key economic benefits; one that allows businesses--
from manufacturing to healthcare to agriculture to energy to
technology--to improve their planning and forecasting, manage
unforeseen and uncontrollable events, offer more stable prices to
consumers and contribute to economic growth. The imposition of
unnecessary burdens on end-users businesses restricts job growth,
decreases investment and undermines our competitiveness in Europe--
leading to material cumulative impacts on corporate end-users and our
economy.
While we support reforms to enhance derivatives market transparency
and reduce systemic risk, we remain concerned that a regression to
dual-sided and intragroup reporting would place disproportionate,
costly and unnecessary burdens on end-users and would not provide
regulators or markets with any discernible benefit.
Throughout the development of the G20 framework, the passage and
implementation of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, the Chamber and the Coalition have advocated for a more
transparent derivatives market through the imposition of thoughtful,
new regulatory standards that enhance financial stability while
avoiding needless costs on end-users. The importance of prudent
regulation and international harmonization of regulatory standards that
promote Main Street business has been echoed by Members of Congress,
including by Chairman Conaway, who has noted that bipartisan efforts
must ``protect end-users from being roped into reporting, registration,
or regulatory requirements that are inappropriate for the level of risk
they can impose on financial markets. It is clear that end-users did
not cause the financial crisis, they do not pose a systemic risk to the
U.S. financial markets, and they should not be treated like financial
entities.'' \1\ These efforts are clearly reflected in the Commodity
End-User Relief Act, which includes several provisions to provide end-
user relief, including ensuring that there is adequate time between
completing and reporting a transaction to protect an end-user's hedging
in thinly-traded markets.
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\1\ Press Release, Congressman Conaway Praises Approval of the
Customer Protection and End-User Relief Act, U.S. Representative Mike
Conaway (Apr. 9, 2014), available at http://agriculture.house.gov/news/
documentsingle.aspx?DocumentID=1110.
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As the Subcommittee considers the U.S.'s implementation of G20
reporting obligations, it is our hope that the effects of such
requirements on commercial end-users are at the forefront of that
consideration. Continued support for global standards, rather than
proceeding on divergent paths, is important for data reporting
consistency. It also has the potential minimize reporting burdens for
end-users through the development of high quality data that can be
easily understood and used by regulators throughout the world. While we
realize that Congress does not have a direct hand in the implementation
of the G20 framework, Congress does have ability to influence that
process by promoting harmonization and a sensitivity to the impacts on
end-user companies. Together we can strengthen our financial systems by
supporting Main Street business.
Thank you and I am happy to address any questions that you may
have.
The Chairman. Thank you. I have several questions as I know
the other Members do as well. This will be for Ms. Kruse or Ms.
Collazo, predominantly.
In its 2010 report entitled Implementing OTC Derivatives
Market Reforms, the Financial Stability Board stated
authorities must have a global view of the OTC derivatives
markets through full and timely access to the data needed to
carry out their respective mandates. The recommendations help
achieve this objective, including that trade repository data
must be comprehensive, uniform, and reliable, and if from more
than one source, provided in a form that facilitates
aggregation on a global scale.
Ms. Kruse, Ms. Collazo, why has the Financial Stability
Board been so concerned about regulators having a global view
of the swaps market? And how do their recommendations help
achieve that objective?
Ms. Kruse. Thank you, Mr. Chairman. I can start. I think it
is, back to the statement that was made earlier, these are
global markets, and you may have market participants in your
jurisdiction that trade transactions that may seem explicit to
the U.S. markets. But in fact, a lot of their trading activity
and many of their affiliates may cross over into other regions.
And so to understand really the risk that that particular
entity and its affiliates hold, you need to have a broader view
of trading activity.
Ms. Collazo. Thank you, Mr. Chairman, for that question. It
is an excellent one because it is one that is often discussed.
Adding to what Tara just described, it is one about
understanding all the activity, these financial companies have
many entities, and making sure that the regulator can see the
activity of the entity at the parent level, across all of the
subsidiaries and branches that they may have.
But there is another important point here as well,
particularly as it relates to credit default swaps, and the
Lehman crisis was a classic example of that. Lehman Brothers
was an entity as well that, for credit default swaps, that was
the underlying security. And that transaction could occur
between two non-U.S. entities. And during that crisis, there
were rumors that the outstanding debt that firms would have to
pay with Lehman going bankrupt was over $400 billion. Well, we
were actually able to look at the contract because we offered a
post-trade processing service that had all the global data. And
we saw that through aggregating that, it wasn't $400 billion,
it was $6 billion. But the important point here is that these
are contracts that neither side was a U.S. party, yet had a
significant systemic impact. And that to me is a sort of
classic example for why regulators need to be working together
globally because these are inherently cross-border trades, and
there are going to be trades outside our jurisdiction that is
going to be relevant, particularly in a time of crisis for our
authorities to be able to see that information. Thank you.
The Chairman. Were you able to see that difference
immediately, the difference in the $400 billion and the $6
billion?
Ms. Collazo. So it was speculation of the $400 billion
notional. There were rumors essentially that the payout on
Lehman bankruptcy for credit default swaps by those who held
these transactions and had sold protection, they would have to
pay at time of auction, north of $400 billion.
DTCC was uniquely positioned at that time because we were
providing post-trade. We were essentially performing the
management of the operations of the credit default swaps. And
so we took that data and we looked at the payments if the
auction occurred. And the number was not $400 billion. We
identified that if the auction was zero recovery rate, the
amount would be $6 billion. In fact, when the auction for
Lehman occurred, the exchange of payments was $5.2 billion.
The Chairman. If I can, did that take a day? Did it take a
week? Did it take a month? How long did it take you to
determine that it was going to be $6 billion, not $400 billion?
Ms. Collazo. A very long, painful day.
The Chairman. A day? Thank you. I will recognize Mr. Scott
from Georgia for any questions that he may have.
Mr. David Scott of Georgia. Yes, thank you, Mr. Chairman.
Ms. Collazo, did I say that right?
Ms. Collazo. Yes, you did, Ranking Member.
Mr. David Scott of Georgia. Wonderful. I was very intrigued
by your testimony, but I have to agree with you. The cross-
border harmonization issue is very critical. Share with us a
moment because you talked about the nine jurisdictions that you
have. Tell us what those jurisdictions are. And then you
mentioned the workload capacity of did you say 80 million
messages? I didn't get it. Was that 80 million per year or was
it per day? And then what is that other figure?
In other words, what I am trying to get at is the enormity
of this problem and why the issue of transparency is so
critical to identifying systemic risk? But a good starting
point is that you are right. They are sort of in the
wheelhouse, and that was a profound amount of work that you
issued before us. Could you elaborate on those points?
Ms. Collazo. I would be happy to. Thank you for that
question. It is certainly at the heart of what I was trying to
communicate regarding the enormity and the global impact. So I
appreciate it.
So in answer to your first question, as it relates to nine
jurisdictions, these represent the United States under the
CFTC. We also cover reporting in Europe under the ESMA
regulations. We are also in Australia, Singapore, and Japan.
And we support reporting for three Canadian provinces.
And so we have been uniquely positioned really to look
across that data set and identify where those divergences
exist. When I speak about the enormity of the data that is
coming in, the 80 million messages a week that I described, as
it relates to U.S. volume coming through, really is to sort of
set the context of how much activity, messages, are just coming
through, and that this is something in terms of data standards
that become so important when you see this size of information.
In terms of globally what we support for these nine
jurisdictions, we see approximately 300 million a week. So this
is big. And when we sort of think about how we arrive at
reliability, usability of the information, it is not a one-
size-fits-all. It has to be a means where we can, and my
colleague, Tara Kruse, mentioned this, where we can leverage
existing market conventions.
In that example of the $400 billion and the $6 billion, why
were we able to aggregate that information in a day? Because we
have the data held in a highly standard way for credit default
swaps.
Mr. David Scott of Georgia. I want to get to my other
point. I have about a minute left. I want to ask how difficult
or expensive is it, given all of what you are talking about
there, for smaller players in these markets like our end-users?
And Mr. Gil, you may chip in here, too, because that is where
the rubber meets the pavement for us is the complexity of what
this makes for our end-users to interface with the SDRs and
accurately report swaps data.
Ms. Collazo. Yes. So I will say a few brief words and then
I will let Mr. Gil respond to that as well. The work that we
are proposing here will actually drive efficiency, remove
complexity, and ultimately that will benefit the end-users and
in fact, I would even add would enable them to have a level of
transparency into this data being reported that would support
the efforts both from the G20 goal as well as end-users
actually having some benefit here.
Mr. Gil. I would definitely associate myself with those
comments. I would also underscore there is also the mistaken
kind of assumption that reporting simply means sending an e-
mail by an end-user. That is completely wrong. What actually
occurs for an end-user is the creation of a system, a computer
system, usually from scratch, very costly, and usually not in
the best position for someone to actually report. So I would
say that the costs are tremendously high.
Mr. David Scott of Georgia. Yes. So you don't see, for
example, end-users having an exemption from this?
Mr. Gil. Under the current rules, end-users, under single-
sided reporting would rely on their financial counterparties to
do the reporting. Obviously under the dual-sided reporting in
other jurisdictions we have a lot of concerns.
Mr. David Scott of Georgia. Okay. Thank you, sir. I
appreciate it.
The Chairman. Mr. Neugebauer?
Mr. Neugebauer. Thank you, Mr. Chairman. One of the things,
as I sit on this Committee and the Financial Services
Committee, and we have been dealing with a plethora of
regulations that came out of Dodd-Frank, is that changing the
business model into market behavior. And one of the things I
have been particularly concerned about is liquidity in some of
these markets. And markets do not perform well if they don't
have the right amount of liquidity. And what we have seen is
that some of these regulations have changed market players'
behavior. We have seen some players get out of the marketplace.
And so one of the things that I am a little concerned about
is this recently drafted technical specifications creates a
pretty detailed and highly prescriptive set of standards on how
to report each and every trade. And I am afraid that might not
be all that easy for some of the non-standard hedging products.
So I guess, Ms. Kruse, do I have a valid concern that with
all of these changes that we are making, that we are changing
market behavior a little bit and potentially have a liquidity
issue?
Ms. Kruse. Congressman, yes. I would absolutely agree with
that. I think sometimes we go in the wrong direction. There is
a misconception that more data is better data. But it is better
to stick with a core set of data fields that allow you to
understand the market risk of the transactions and focus on
improving those before looking to expand the requirements.
Mr. Neugebauer. Mr. Gil, I am also concerned about these
increased reporting requirements, and we were talking about
end-users. Mr. Scott brought up on the swap market. I think
about adding 120 additional data fields and having to compile
the data and report the data on each and every trade, is
particularly for smaller end-users, that is, to me that is
problematic. Am I missing something here?
Mr. Gil. Congressman, we share your concerns completely.
The CFTC's proposal, while well-intentioned, does ask for a
number of additional data fields that will impose additional
costs. Those costs obviously flow down to end-users. To the
extent that that financial reporting party has to start
collecting that information, it does go to the end-user. The
number one thing that we want to avoid is pricing the end-user
out of the market because of increased costs.
Mr. Neugebauer. Yes, one of the things that I wonder is if
the requirements are maybe well-suited for reporting--could
perhaps be more suited for the dealers, swap dealers,
themselves rather than putting that responsibility on the end-
user. Is that a reasonable thought?
Mr. Gil. Congressman, that is a great question. Honestly,
the costs do end up flowing to the end-user regardless of who
is the reporting party. We have seen that in a number of
different regulations, whether it is capital or margin, and it
applies for reporting, too. I think that the important thing to
do honestly in addition to making sure that the right person
and the right party is actually reporting this information, is
making that information as targeted as possible, eliminating
issues with current reporting issues, and then only asking for
data sets that are truly needed, going forward.
Mr. Neugebauer. Yes. I think one of the things, because I
heard you say a while ago it is pretty expensive, the start-up.
So I am thinking that the infrastructure that the swap dealers
already have in place may be a more cost-effective place to do
that, rather than asking the end-users to have to develop that
infrastructure.
Mr. Gil. Congressman, I would agree with that.
Mr. Neugebauer. Yes. So the final point that I wanted to
make is that I am extremely concerned about, as we have gotten
this new regulation, we have also, with Dodd-Frank, we created
new entities. We have OFR and it is collecting a huge amount of
data. The CFPB is collecting a huge amount of data now,
millions and millions of records on credit card holders across
the country. I am concerned with two things. One is do the
regulators need all that data? But more importantly, now I am
worried about the sensitivity in collecting that data and the
safety of that data because much of that data is very
proprietary. Again, one of the things that we would hope that
the CFTC and other regulators would do is, look. This is the
data we need to make a safety and soundness issue. We don't
need to know that much more about that transaction than a
certain subset. And I am having a hard time believing that we
have 100 fields that will determine whether we have the right
amount of data on that, particularly for non-standard trades as
well.
So Mr. Chairman, thanks for having this hearing today.
The Chairman. Mr. Aguilar?
Mr. Aguilar. Thank you, Mr. Chairman. I have a couple
questions for Mr. Rogers. In your testimony you comment that in
a post-Dodd-Frank world, the Commission has adopted rules for
data reporting that have changed how we view the markets.
Specifically, can you talk a little bit about the transparency
to market participants? Give me an example of that and what do
you believe are some of the most significant gains in these
efforts. And with respect to SDR data quality, do we plan to
continue building upon this progress and how will we do that?
Mr. Rogers. Thank you for the question, Congressman. I
would say that from a significant advancement perspective that
at the Commission we have a view into the data that we did not
have at the time of the financial crisis. And we are actually
able to make use of the data that we get through the SDRs every
day. Those purposes are to assess exposures for particular
market participants overall but then also assess risk,
financial risk, to firms and whatnot. So we actually analyzed
the same data that is coming into the SDRs for those purposes.
Other purposes would be for the de minimis study, for
example, that is currently ongoing. Or Made Available for
Trading.
So, we have a variety of divisions performing market
oversight functions or monitoring swap dealers or assessing
financial risk that are all looking at data that we didn't have
a view into before and are able to then do analysis, reach out
to industry participants if there are questions that we have
about the data and be more informed about what is happening in
the marketplace. I think that is the most significant
advancement that has been made. I would add that certainly
there is lots of work that needs to be done, moving forward, in
terms of improving the quality of data, but we actually are
using the data on a daily basis.
One other thing that I would add is that we are trying to
create clarity in terms of what data we would expect to see and
how we would expect to see it. That was the purpose of the
technical specifications document that was issued with the 120
fields. We believe with that clarity that the quality of data
will improve, the quality of the data going into the SDRs will
improve because people will know what to submit and when. That
is the objectives of those efforts.
Mr. Aguilar. I appreciate it. One more for you. The
regulators, the global regulators working on this through the
data harmonization working group to propose guidelines for
harmonizing the derivatives data across the jurisdictions, work
streams are taking place on data elements such as unique trade
identification, unique product identification, and other data
elements. Once the working group puts out its recommendations
expected later this year, how will CFTC respond? Will it use
these recommendations? What do you think are some of the next
steps, and do you envision that there will be changes that are
needed based on that work?
Mr. Rogers. Thank you for the question, Congressman. The
guidance that is being issued through the CPMI-IOSCO initiative
is truly guidance to the regulators on the standard ways to
represent this information with the notion that the regulators
that are participating in this activity will adopt that
guidance and implement it in their jurisdictions. From a CFTC
perspective, we would certainly expect to be implementing the
guidance of this initiative.
Even at this point, we are looking at how that would be
done. So there may be some aspects to the guidance that comes
out that would not require a change to rules but probably would
require some guidance from the Commission, and there may be
some that would in fact require changes to rules.
So that is something that we would be looking at, and we
would expect that other regulators that are a part of the
process would be doing as well. That is actually something that
we talk about when this committee gets together to discuss the
implementation, and that is where a lot of coordination
happens, both domestically and internationally in the work that
we are doing, moving forward, to create that global harmonized
standard.
Mr. Aguilar. Thank you. Thank you, Mr. Chairman.
The Chairman. Mr. Lucas is not here, Mr. LaMalfa?
Mr. LaMalfa. Thank you, Mr. Chairman. Mr. Gil, of course, I
am glad we are having this hearing. It is important to hear
from the end-users on how this process works or the
difficulties of it. You didn't have a whole lot of time
earlier. Could you elaborate a little more on the burdens that
are imposed on the end-users by this amount of data that is
required? Would you care to elaborate a little bit more on what
that really looks like and what kind of a barrier that might
actually be towards trading?
Mr. Gil. Absolutely. That is a great question. Thank you
for that. I think that one way of kind of thinking about it,
again, I use the analogy of someone thinking that an e-mail is
sufficient. Sometimes people don't realize that an end-user
also has a continuous obligation to update that information
that is posted. So you have to create a system from scratch.
You have to create the code in order to actually implement the
system. Then you have that reporting obligation, going forward,
in terms of updating that continuous information.
Let me take the example of Europe where that is even
tougher. So for example, you have a dual-sided reporting
obligation, and usually you would actually rely on the
financial counterparty to supply that information and send it
to an SDR. In that situation, you actually have to do it
yourself. So the end-user has to adopt this to begin with.
So for an international company that is doing both business
in the United States and Europe, sometimes they are faced with
a situation where they may not have to post that information or
report it in the United States but they do in Europe. And that
creates complexity and burden.
Mr. LaMalfa. And how much do you think that has created a
barrier with international transactions?
Mr. Gil. I think it has been significant, Congressman. I
don't have any numbers on me.
Mr. LaMalfa. This isn't the first time it has come up. Ever
since I have been on this Committee, it has been a topic that
has been a source of frustration with trying to--more
harmonization is needed between the U.S. and European concerns.
Please.
Mr. Gil. Right. To answer that question, it is important to
look at how this system has kind of developed over time. The
Europeans have decided to actually develop the system that is
very different from the CFTC and what we have in the United
States. A few years ago the CFTC granted no-action relief and
has helped with a lot of these different reporting obligations,
which we really appreciate.
So for example, inter-affiliate reporting which would have
been very burdensome for end-users, is something that the CFTC
has granted relief from. Europe is different, and because of
that, we face different reporting obligations.
Mr. LaMalfa. The level of detail Mr. Neugebauer was talking
about as well, the amount of data, the number of fields
expanding, how do you find that as being really helpful or what
do you think the theory is, or how that would even actually be
helpful? We have a lot of data. We have a lot of data to keep
track of. Is it secure enough? At the end of the day, is it
useful to anybody on the regulatory end?
Mr. Gil. I think you have a great point there, Congressman.
The fact is, more information is not necessarily helpful or
useful, and we need to actually look at that.
So for example, I have used the example of the EU because
it is very helpful here. In the dual-sided reporting regime,
you have about 50 percent matching, so in other words, 50
percent actually working in that system. You have more
information in that system, though, because it is coming from
two different sources. Taking that analogy and using it here,
now you have 120 new data fields. You might have potential
mismatches. You are going to have a lot of false positives.
More information is not necessarily helpful in that respect.
Mr. LaMalfa. It seems like one could get lost in all that,
and I don't know if it is even looked at on the regulatory end
anyhow. Ms. Collazo alluded to that as well.
Mr. Rogers, again, we are hearing multiple times whether
here in this room, I had others in my office complaining about
the overload of information as it affects credit unions in the
Dodd-Frank situation and just a lot of frustration with what
many people feel are unneeded levels of information. The
harmonization problem across the border is huge since I have
been here hearing these testimonies over time.
What do you see are really the biggest differences between
the United States and G20 members on these reporting
requirements and what is CFTC going to do to have a much better
harmonization so we are not creating a barrier or even Europe
looks at this as hostile towards trade? I am short of time,
too, so you have to hurry a bit, please. Thank you.
Mr. Rogers. Yes. Thank you for the question, Congressman. I
believe the work that we are doing internally with CPMI-IOSCO
is geared towards in particular a set of fields that are
necessary for aggregation and standardizing on that front. The
work that we are doing at CFTC is fitting into that, but when
we look at the data that we are asking for, we look at it from
the perspective of the use cases that we have at the
Commission. And it is based on the specifications that are
intended to provide greater clarity for fields that are already
being asked for but then there are also situations where there
were new asks of data as it relates to that particular
technical specifications document.
Mr. LaMalfa. Right. I better cut you off there.
Mr. Rogers. Sure.
Mr. LaMalfa. But every time I hear about more clarity, it
seems to be a greater burden on the people, whether it is this
or whether it is clarity as set down by the Army Corps of
Engineers on their policy. I will yield back, Mr. Chairman.
Thank you.
The Chairman. Thank you. I am going to go to a second round
of questions pretty quick and try to move fairly fast through
these. Mr. Rogers, I have a couple for you real quick. Does the
CFTC have full and timely access to all of the data needed to
carry out the mandates of the Dodd-Frank Act to enhance
transparency, promote standardization, and reduce systemic
risk?
Mr. Rogers. I believe we do have access to the data that we
need, but I do believe that there are refinements that need to
be made in that data in terms of the quality of it, whether it
is complete or whether it is accurate. And we are taking steps
in that regard. There are circumstances where data has been
identified, new data that would be required. But for the most
part, I would say that we do have access to the data to perform
quite a lot of the functions that we are required to perform.
The Chairman. Do you or does any other authority have a
global view of the swap markets?
Mr. Rogers. Thank you for the question. I would say that at
this point in time, no. We have a view into the data that we
have jurisdiction over, and that gives us insight. And we would
have to reach out then and get data that we would need in a
broader context. It is an issue that is being worked on through
the Financial Stability Board and CPMI-IOSCO. But at this time
the mechanism that would be envisioned to have a single place
where every jurisdiction could go to do that assessment is not
in place at this time.
The Chairman. Why not?
Mr. Rogers. I believe it is a complicated matter that
requires examination from a variety of different fronts. One of
them would be the legal barriers, and in the United States we
have just had the repeal of the indemnification provision. But
in other jurisdictions, there are similar barriers to having
that information being shared. Other laws, like privacy laws
and things like that, there are governance and data protection
things that would need to be worked out to make sure that the
data that would be available is available in appropriate ways
and protected properly and used properly. So those are just a
couple of issues that would need to be addressed to stand up a
regime like that.
The Chairman. As you work through that, it would be helpful
for this Committee to have those recommendations, especially on
how we protect people's privacy while at the same time making
the data useful.
One more question: Within the confines of your recent
appropriations, what work are you doing to improve the
technological capabilities of the Commission to accept,
process, and analyze swaps data from the SDRs?
Mr. Rogers. Thank you for the question, Congressman. We are
working on a variety of fronts, starting from the technological
layer. There are cycles to technologically refresh our
environment. So as an example, our storage capacity is
something that we are addressing this year. From a more data-
oriented perspective, we are working very hard to provide
specifications that will hopefully improve the quality of
information but also working on the systems that are necessary
to combine data from multiple swap data repositories in such a
way that our staff, regardless of the divisions that are
represented, can go to one place and do the analysis that they
need to do to carry out the mission of the Commission. So quite
a lot from both the technological front and from the data
perspective.
The Chairman. I have one more question if I may, Mr. Scott,
before I go to you. Ms. Kruse, it was mentioned the importance
of using existing market conventions. What are those market
conventions and what are we using instead of those conventions?
Ms. Kruse. Sure, thank you, Mr. Chairman. It is a very good
question. The conventions, the key ones, are the following:
There are the product definitions that have been published and
developed over time that are used by market participants to
agree to the terms of their transactions and confirm the terms
of the transactions. They establish terminology and definitions
for terminology that frankly just are the market standard for
how derivatives are agreed and confirmed. Yet those terms and
the definitions that underlie them aren't being consistently
used in leverage. Instead, you have regulators creating new
terms to represent the same information or defining it
differently which isn't really economically what was agreed
between the parties.
Also from an electronic representation, there are standard
ways to represent some of this data. A lot of that is in the
Financial products Markup Language. This is an open-source
electronic messaging scheme that is used by market
participants, even before there were reporting requirements to
electronically confirm the trades. So there already is a
mechanism to represent consistently for instance things like
business day conventions established in these, or certain dates
and payment types, et cetera. And those values are not
necessarily being leveraged and reflected in the regulatory
requirements. Instead, regulators start fresh and kind of
reinvent the wheel to come up with their own values. If you go
back to these standards and regulators align to them, it not
only increases the efficiency of reporting but increases the
consistency between the regulatory requirements.
The Chairman. Thank you. Mr. Scott?
Mr. David Scott of Georgia. Yes, thank you, Mr. Chairman.
So this morning we have heard from the panel, Ms. Kruse,
Collazo, and you, Mr. Gil, that we have global regulators that
are working together with the CPMI-IOSCO Data Harmonization
Working Group, and they will propose guidelines for harmonizing
derivatives data across all of the nine jurisdictions,
according to Ms. Collazo, and that work streams are taking
place on data elements such as the unique trade identification,
unique product identification, and other data elements.
So then I have to turn to you, Mr. Rogers, and ask you,
once this working group, as your three fellow panelists have
laid out, puts out its recommendations, which I understand is
expected later this year, will you, the CFTC, heed those
recommendations?
Mr. Rogers. Thank you for the question, Congressman. Let me
provide a little context behind the recommendations that are
coming out from the CPMI-IOSCO group. They are focusing,
besides the UTI and the UPI, on 80 fields that are necessary
for de-aggregation of data. Within those 80 fields, yes, the
CFTC does plan to adopt the recommendations of the group. The
needs though in terms of what the CFTC does with data actually
is broader than the mandate of those 80 fields. And that is why
we have in our technical specification that has come out 120
fields as an example actually covering three asset classes:
credit, interest rates, and foreign exchange.
Mr. David Scott of Georgia. Right. So your answer is that
you will heed the recommendations? Now let me give you this
entrance ramp by asking you that if you do, do you envision
that there will be changes needed to current rules and
reporting requirements based on this work?
Mr. Rogers. Thank you for the question. I believe that
there is certainly the possibility that that would exist. I
don't know that I can say categorically, but I believe that
that is in all likelihood a possibility. I think that for
example in our Part 45 rules, there are very specific
appendices in the back of that, and there might be adjustments
that are needed to that. But there could be adjustments in
other areas.
One of the things that we are looking at from a Commission
standpoint is the potential for changes to our rules based on
information that we know now. But also, I could envision that
changes would be required as it relates to that work that is
being done by CPMI and IOSCO.
Mr. David Scott of Georgia. Okay. Let me ask each of you to
comment, if you could. The data quality in ISDA swaps data
repository is high, very high. There is a high bar for data to
make it into the swap data repository and many validations are
in place to ensure data quality. All of the SDRs have been
working together to present data in the most efficient manner.
And the suggested path forward is to allow the SDRs to work
with the CFTC. And I have been assured that this is a very
achievable goal. Yet, there is still talk about improving the
quality of the data. So my question is, what is the best path
forward to improve that data quality? Mr. Rogers?
Mr. Rogers. Thank you for the question. I think that from
the CFTC's perspective, as I mentioned in my opening remarks, I
believe that in some cases the swaps data repositories don't
feel that they are empowered to reject data. If we provide
greater clarity on: first, that they can; and second, just what
the criteria would be for validation, whether it is making sure
that data that is not supplied is now supplied or more
complicated things around data quality, that will substantially
improve the quality of the data coming to the Commission. And
so that is a priority focus of ours.
Mr. David Scott of Georgia. Thank you, Mr. Chairman.
The Chairman. Mr. LaMalfa?
Mr. LaMalfa. Thank you again, Mr. Chairman. Mr. Gil,
listening to the complexity of this day and over time, there is
certainly a case to be made, can exceptions be made from
somebody's reporting requirements at a certain level or a
certain timeline? Would you have any recommendations on that?
Would you be supportive of that? And if you would, how would
you put that into place? How would you implement that sort of
thing?
Mr. Gil. Thank you very much, Congressman, for that
question. I think it is completely appropriate to be looking at
this, looking at the burden that is imposed on end-user
companies and finding out if there are exemptions or abilities
to tailor that type of reporting in a way that will be
appropriate for end-users.
In terms of specific recommendations? It is difficult to
say considering that this is a technical staff document, alpha
proposal. I think the main point, though and the main point
that I underscore that the other panelists have also mentioned
is that it is incredibly important to make sure that it is
consistent with the work being done by CPMI-IOSCO. It needs to
be consistent with end-users, especially the businesses across
different jurisdictions need to have the same reporting
obligations throughout.
Mr. LaMalfa. Thank you. Let me shift to Ms. Kruse, too, I
picked up that you talked about the reinvention of the wheel,
whether it had been a way of doing things that was working and
now you have to almost scrap that in order to have these two
different languages talk to each other in really plain terms
here. What would you see is the concern about the previous way
of doing things as being deficient? Where is that concern
coming from and what are these--elaborate more on the pitfalls
of having two different methods of doing that with this
reinvention of the wheel as you mentioned?
Ms. Kruse. Thank you, Congressman. I mean, the real pitfall
is that it is very inefficient trade. It also creates a lack of
clarity. It allows participants to interpret the data in a
different way, potentially report it in a different way, in a
different way than they might have agreed to trade or the way
they might have confirmed it bilaterally between themselves.
Ideally, if you want good quality data, you want the data
to be provided to the regulators and viewed by the regulators
in the same terminology and in the same form and as close to
the same form as the parties agreed to it between themselves to
begin with.
Mr. LaMalfa. So the industry standard amongst the people
talking to each other, doing it, should be adapted to by the
regulatory agency so that you are going to get better quality
instead of trying to translate it into something completely
different that they don't work with basically?
Ms. Kruse. Yes. That is correct. I mean, a lot of the
issues you see with data quality are not attributed to the fact
that the parties don't agree on the terms of the trade. They
have confirmed the trade. They have legal certainty. It is the
way the data is transformed differently by parties sometimes
due to technological differences in their systems, sometimes
due to different interpretations of what is required or asked
for by the regulator that ends up showing it is very----
Mr. LaMalfa. What is the quality of the technology that the
regulator brings to the table compared to what you have within
your system?
Ms. Kruse. I think it is more so about the regulators
adopting what is already available from an industry perspective
because parties use those standards to provide the information
to the regulator, and then the regulator can leverage and
benefit from those existing standards. It ought to save them a
lot of work, and it ought to provide a mechanism for more
consistent data.
Mr. LaMalfa. Thank you. Sounds sensible to me. Ms. Collazo,
you talked about having an international governing framework
here where you would have, in order to cover this international
misunderstanding here, you would have an outside group made up
of multi-national entities to speak to each other about that,
come to agree. Could you elaborate on how that would come
about? How do you envision that and how would that be formed
and what would it be accountable to?
Ms. Collazo. Thank you for the question, Congressman. In
terms of the governance model, it is really a jumping off point
from what Tara Kruse just discussed which is their existing
market standards. And our hope and expectation is that those
standards are recognized at a global level.
But we also know that standards evolve over time. And we
don't want it to be----
Mr. LaMalfa. I'm sorry, running out of time. But how would
you formulate this international entity or governance group
that would be trying to assemble this? How would that come
about?
Ms. Collazo.--governance. Right.
Mr. LaMalfa. If you could please?
Ms. Collazo. So essentially what we would like to see is
that the governance model is such that it has representatives
from each of the jurisdictions, major jurisdictions that have
derivatives data and that they are constantly--that they can
take inquiries. It can be a governance model that is owned by
the industry, such as ISDA has particular governance oversight
of certain data elements. Regulators representing multiple
jurisdictions can be part of that governance framework. And
then there can be a process for as the standards evolve for
this governance framework, to review it, to comment on it, and
to make sure that it is aligned with how entities would report
and the changes they would have to make to this.
Mr. LaMalfa. Okay. To sum up then, would they have any kind
of a regulatory authority or is it more of a recommendation
that has credibility amongst all the separate groups that
should be paid attention to? Are you going to empower them with
some kind of enforcement or some kind of regulatory--
Ms. Kruse. I would say--it is a great question. I would say
that it is more about enabling the standard to evolve and that
the regulation recognizes that governance framework so that as
changes occur in the market, the data is consistently being
updated on a global basis.
Mr. LaMalfa. Thank you. So they could be listened to and
with credibility. Mr. Chairman, I thank you for your
indulgence. I yield back.
The Chairman. Thank you, Mr. LaMalfa. We will take that
minute-and-a-half out of the next meeting. Mr. Davis?
Mr. Davis. Thank you, Mr. Chairman, and thanks to all the
witnesses for being here today. I would like to start with Mr.
Rogers. As the CFTC pushes to develop these standards to report
each and every swap trade, are precautions being taken to
ensure that such rules don't end up hurting liquidity? Because
reporting actually imposes real costs on the market
participants.
Mr. Rogers. Thank you for the question, Congressman. Yes, I
would say that the data that is being asked for is being looked
at in terms of the implications for the use by the Commission
and on the marketplace in general. We have focused on in fact
in our technical specifications existing standards, existing
practices and look forward to feedback on exactly what we are
asking for and how that fits into the framework that already
exists with the notion of trying to ensure that we are able to
accomplish our regulatory mission but also trying to not be
overly burdensome to industry.
Mr. Davis. Okay. Ms. Kruse, does industry feel the
regulators are only demanding the information they need or
expanding into new fields?
Ms. Kruse. Thank you, Congressman. I mean, we definitely
feel that they are expanding. That is right. I would really
question the idea that the 120 fields in the technical
specification are all priority fields. Many of these are new
fields. There are probably a couple dozen of them that are
brand new fields which is an expansion of reporting
requirements. At this point in time people feel it is more
important to focus on improving the data fields that are
already required by the Commission and making those more useful
rather than looking to expand the scope of the requirements.
Mr. Davis. Okay. Now we know every SDR is going to need to
make some changes to comply with this uniform reporting
standard. Are you concerned that the regulators won't give
industry enough time to implement some of these changes with
the fields that you have mentioned? Ms. Kruse, go ahead.
Ms. Kruse. That is for me, Congressman. Thank you for the
question. Yes, it could take significant time. I mean, one of
the concerns that we really have is that we don't want
jurisdiction-specific implementations. We want the global
initiative at CPMI-IOSCO to play out, and to the extent that
there are changes that are necessary to promote consistency,
which there probably will be, then the industry is very willing
to do that. But they want to do it in a globally coordinated
fashion. It is very expensive and inefficient to have interim
jurisdiction-specific changes to regulations, especially if
those might then be superseded by the global mandates.
Mr. Davis. Okay. Well, I guess for the other two witnesses,
do you have any comments on any of the questions I have asked?
Ms. Collazo. I would add one other comment in terms of the
data and having a much more narrow focus on improving the
quality there. Really, it is about the ability, when we think
about usability, it is about transforming this data into
information. And the only way to do that is to have a
consistent standard. So we would absolutely agree that
narrowing the focus on what are the key economic terms, what
are the key data elements, for example, the parties to the
trade that are needed to be able to aggregate and have useful
information. Data in and of itself is not information.
And so when looking at that, we think that there is a much
more narrow set of data elements. In fact we did suggest to
CPMI-IOSCO that that data set is somewhere in the vicinity of
30 to 50 fields. And we made that specific recommendation on
those fields for credit derivatives. So we would really urge
that there be a much more narrow lens around these data
standards, that the focus is around how would that information
be used? What aggregation, what output of the data would be
utilized by the regulators? And that is the objective we should
be turning our attention to.
Mr. Davis. Okay. Thank you. Mr. Gil?
Mr. Gil. I would associate myself with the comments of Ms.
Kruse and Ms. Collazo. I would also add----
Mr. Davis. And not Mr. Rogers?
Mr. Gil. Not Mr. Rogers.
Mr. Davis. Okay.
Mr. Gil. What I would say, though, in addition to the
points that they raised, we have to look at what tools are also
available currently to talk about swap data quality and, for
example, portfolio reconciliation and confirmation of trades.
Those basically ensure that the economics of the bargain that
are actually entered into between parties is confirmed. So when
we are talking about data quality issues, we are talking more
about month, date, year versus date, month, year kind of
issues, not the economics of the actual transaction.
Mr. Davis. Right. Well, thank you all very, very much. Mr.
Rogers?
Mr. Rogers. May I add something? Yes?
Mr. Davis. If the Chairman allows me extra time, you can.
The Chairman. Absolutely.
Mr. Davis. Thank you.
Mr. Rogers. Thank you both. So I wouldn't say that without
question we are looking at how the global standards align with
the things that we are asking for. And a real good example of
that is the UPI data element. We have been having conversations
with industry for a long time about the unique product
identification and how to represent that, and we are
specifically asked, ``Please don't create something at the
Commission that would then be overtaken by an international
standard.'' And it is for that reason that that is an element
that hasn't been brought into the conversation.
We work very hard to align what we are doing domestically
with what is being done internationally and do try to leverage
international standards. Having said that, we have gotten
feedback at our TAC meeting this week that some of the things
that we were asking for in our technical specification did
represent more things than we were asking for and heard very
clearly that the recommendation was focus on making the
elements that we already have better before asking for new
elements. And that is something that we will absolutely take
into consideration as we contemplate the comments that we have
gotten or will be getting as a result of this----
Mr. Davis. I think from some of the questions we have
asked, I respect the fact that the CFTC is willing to take
those ideas into consideration. We would urge that to happen,
and we appreciate your willingness to work with us. And thank
you all for being here, and I don't have any time to yield
back.
The Chairman. Mr. Kelly?
Mr. Kelly. Ms. Kruse, the CFTC swap data reporting
requirements are not fully aligned with the SEC's requirement
for securities-based swap data. Differences exist as to who is
obligated to report, reporting timelines, and what data is
reportable. What is the impact of these discrepancies between
the SEC and CFTC's swap data reporting standards?
Ms. Kruse. Thank you for the question, Congressman. It is
an excellent one and one that I have been quite concerned
about. We have been working with the SEC in providing comment
to them as they have worked to finalize their rules. And one of
the major comments that our members have continued to put
forward is that the SEC should be working to try and align with
the CFTC to the greatest extent possible.
What it means for our participants is a great deal of
additional cost and inefficiency because they have to build out
different reporting pipelines, different reporting logic,
different reporting data fields for their securities-based
swaps as they are currently reporting for their swaps. It also
creates a great deal of expense for trade repositories that are
looking to support it. That cost gets passed back to the market
participants.
The SEC also has a requirement that goes to the end-users,
very specifically they are looking for the party who is not
responsible primarily for reporting to supplement the data with
unique identification codes like trader IDs and trading desk
IDs which amounts to requiring these parties to be onboard to
all of the trade repositories and building out their own
pipelines to report additional data.
Mr. Kelly. And if I mispronounce your name, I apologize.
Ms. Collazo? If you or Mr. Gil, I noticed you were nodding
during some of that. If you have comments that you would like
to add, I'd just appreciate it.
Ms. Collazo. Thank you, Congressman, for the question. I
would absolutely agree with the comments that Ms. Kruse made,
and this is a real concern because we have talked about
globally but even domestically we have these challenges. We are
very concerned about the impact that it will have in terms of
the quality of the data that we will receive. These types of
fields, additional fields that are being recommended by the SEC
is not information that is otherwise held in a systemic way.
There are challenges in adhering to it in terms of the end-user
impact. How are the swap dealers to gather this kind of
information? As a swap data repository, how can I know that
that information is actually accurate? And it is also morphing
into concerns such as personal information. There are
additional obligations that the SEC regulation has about a swap
data repository being an issuer of these identifiers. And we do
not believe that that is a role that a repository should play,
and we question the value of that measured against the
information that would be derived.
Mr. Kelly. And I apologize, Mr. Gil. I wanted to give Mr.
Rogers just a chance to respond, and I will come back to you if
I have any time. What is the CFTC doing to harmonize the data
reporting standards with the SEC, Mr. Rogers?
Mr. Rogers. Thank you for the question, Congressman. I know
that SEC and CFTC from a mission policy setting direction do
coordinate their activities that they have going on within
their particular purviews. I can also say that the SEC does
participate in the CPMI-IOSCO initiative, and that is a means
of collaboration between our organizations at the very specific
data level. Of course, it is up to the particular jurisdictions
to adopt the recommendations that are coming out of this
initiative. But we would expect that everyone would be adopting
it. So there is coordination at the very specific data level,
but there is also coordination at the policy level.
Mr. Kelly. And Mr. Gil, you have my remaining 30 seconds.
Mr. Gil. Thank you. I would only add in addition to the
differences that have kind of been noted here is inter-
affiliate reporting. And so the CFTC in its no-action relief
granted relief from that in its reporting rules. The SEC seems
to be going down a different route and will require it despite
the fact that it is internal risk management. So end-users find
that to be a significant concern. We will be inputting comments
on that.
Mr. Kelly. Thank you, and Mr. Chairman, I yield back.
The Chairman. That is right on time. Ladies and gentlemen,
Ranking Member Scott and myself, we would like to thank you for
coming and testifying before the Committee today. Under the
rules of the Committee, the record of today's hearing will
remain open for 10 calendar days to receive additional
materials and supplementary written responses from the
witnesses to any questions posed by a Member. This Subcommittee
on Commodity Exchanges, Energy, and Credit hearing is now
adjourned. Thank you.
[Whereupon, at 11:28 a.m., the Subcommittee was adjourned.]
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