Swap Data Proposals Raise Existential Questions

How do regulators actually put to good use the vast amounts of data they collect from financial firms?

This is a perennial question in the post-crisis era. And it’s a fair one considering how much money and human resources financial firms have invested into new systems to comply with the unprecedented demands of post-crisis frameworks like the Basel III standards, the Dodd–Frank Act and Mifid II.

The corollary of that question is: if regulators can’t derive insight into systemic risk, what is the point of imposing onerous reporting requirements on firms, which often clash with other regulators’ requirements? This is something the Commodities Futures Trading Commission (CFTC) should be pondering as it considers industry reaction to its latest proposals on swap data reporting.

The regulator published the proposals on February 20, and they should be welcomed by reporting entities, as the CFTC’s intent seems to be to clarify and simplify its swap data reporting and recordkeeping rules, and harmonize requirements with the Securities Exchange Commission and the European Securities Markets Authority.

CFTC chairman Heath Tarbert said in a statement when the proposals were released that they “reflect a hard look at the data we are requesting and the data we really need. … Clear rules are easier to follow, and market participants will no longer be subject to reporting obligations that raise the costs of compliance without improving the resilience and integrity of our derivatives markets.”

If the proposed modifications become rules, the number of reportable fields would shrink to a standard set of 116 that have been identified as core to the CFTC’s aims. Also, the Unique Transaction Identifier would be adopted in place of the Unique Swap Identifier, firms would report margin and collateral every business day, and they would extend the reporting deadline to T+1.

There’s a lot for market participants to chew on during the three-month consultation period, and some firms will probably have to invest in new technology. But what’s all the effort for if regulators can’t make heads or tails of the information they have accumulated?

Regulators must be explicit about the policy justifications for regulatory reporting, which is so costly and troublesome. CFTC commissioner Dan Berkovitz made this point on February 20. He supported the proposals and they were passed unanimously, though he took issue with certain specific requirements.

Berkovitz said swap data is fundamental to the CFTC’s purpose: ensuring the financial integrity of all transactions, and thereby ensuring financial stability. For this, the regulator needs to be able to not only collect appropriate data, but also ensure that it’s accurate and standardized so it can be aggregated and analyzed. But that’s not enough—the Commission must also develop the tools and resources to actually be able to perform those analyses.

The proposal doesn’t address actual use-cases for which the data will be collected, or the analytical needs for swap risk management oversight, Berkovitz says, adding: “Regrettably, the Commission has yet to set forth with any specificity how it intends to use this swap data to evaluate or address systemic risk.”

The Commission should make it a priority to build a risk monitoring system for swaps, Berkovitz added, as it has monitored futures and options for decades on a daily basis.

The extension of the reporting deadline to T+1 may increase data accuracy as reporting entities have more time to check their submissions, Berkovitz said, but it will constrain the CFTC’s ability to perform real-time risk monitoring on the data in times of market stress. The point is moot, anyway, as he said that to date, such monitoring has not been possible due to the lack of a monitoring system.

Berkovitz also criticized the new requirement to report margin data, saying it’s not clear whether the collateral data would be right for the Commission’s purposes, and arguing the agency might be able to do analyses with the data it already collects.

The CFTC needs to better articulate its needs and how it will go about analyzing this data. The alternative is, in Berkovitz’s words, nothing less than to fail in the CFTC’s central mission of responding to systemic risk and ensuring financial stability. It is essentially to risk another full-blown financial crisis.