Compliance with the Dodd-Frank Act has created significant difficulties for commodity traders and greatly increased the compliance burden for trading companies. Transitioning to Dodd-Frank compliance is a lengthy and tedious process which will require the companies to enact major changes to their reporting and accounting procedures..
SDRs differ in reporting requirements
Swap data repositories (SDRs) have been created under the Dodd-Frank Act to “provide a central facility for swap data reporting and recordkeeping” according to the U.S. Commodity Futures Trading Commission (CFTC). The Act requires all swaps to be reported to each of the SDRs where the swaps may be traded. The three SDRs currently established include CME Swap Data Repository (owned by the Chicago-based CME Group Inc (NASDAQ:CME), DTCC Data Repository (established by the New York Depository Trust & Clearing Corporation or DTCC) and the Ice Trade Vault (created by the Ice exchange).
Energy companies feel that the problem is in large part due to the fact that the trades must be reported to separate SDRs with separate compliance and reporting standards. Since the SDRs were created independently by different companies, there are huge differences in the trade reporting requirements of the SDRs. This means that labor-intensive and manual processes are required to comply with the reporting requirements of all three SDRs.
“Compounding the headaches for energy companies, the DTCC and Ice have taken different approaches to the data they require from market participants. While the DTCC offers many different ways to report the same type of transaction, Ice typically offers only one way to report the transaction, industry sources say. Especially where transactions are more complex, there can be many ways to report them to the DTCC, and the end-user may have a different interpretation from its bank counterparty,” analyzes Osipovich in a recent article on Risk.net.
The tedious manual process gives rise to a looming threat for both the market participants and the CFTC – the accuracy of reporting. The CFTC is concerned that the effectiveness of the regulation would be lost if market data was unreliable. Similarly, energy firms fear enforcement action against them in case they are unable to ensure the quality of reporting. This requires repeated validation of data entered and additional costs with no guarantee of accuracy.
CFTC recognizes the problem: Dodd-Frank
Industry participants have been protesting the reporting requirements since the discussion started on the Dodd-Frank Act. The CFTC has been trying to make the process of implementation of the new regulation as easy on market participants as possible. The CFTC held a meeting on the 10th of February to discuss the efficiency of the process.
“The harmonization effort between the CFTC and the SDRs has been very valuable in making the data more consistent, and therefore more usable for regulatory purposes, but there is much more work to be done on an effort that is both complex and time intensive,” admits the CFTC.
Harmonization of SDR data
In the recent meeting, the CFTC discussed a plan for harmonization of SDR data. A team of CFTC staff and members from all SDRs will be created to work on:
- harmonizing data already existing in the SDRs, not on requiring new data from submitters
- an agreement of consistent data content, not on delivery method
- phasing by asset class (CDS asset class first, then IRS and other asset classes)
SDRs will be required to provide action plans by phase and by asset class to document how they will implement data harmonization. The technology experts from each SDR can put their heads together to come up with similar data reporting that can be implemented by all.
CFTC also plans to support companies such as energy firms in ensuring the accuracy of data by continuous development of completeness and accuracy checks. the CFTC hopes to provide continuous feedback mechanisms to submitters through updated technical guidance in the future.