- Source: cftc.gov
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CFTC Rewrite Highlights:
The Commodities Futures Trading Commission (CFTC) has been working on updating new rules and reporting methods to better meet the needs of the moment, increase harmonization, and standardize across multiple intra- and international regulations institutions. In November 2020, the CFTC published what was hoped to be the final version of updates to the CFTC Rewrite. Specifically, new rules relating to Technical Specifications for parts 43 and 45 reporting with other consultation phases finalized and published in September 2021.
However, initial rules have proved insufficiently prescriptive, which caused the industry to make assumptions on what data was required, leading to divergence in interpretation which compromised data quality. As the CFTC Rewrite represents the most extensive regulatory reporting change since CFTC reporting began, market participants have not started the review, design, build, and test phases needed to modify their swaps reporting system. The industry has requested the May 25 date be postponed to complete the build and testing of their modified swaps reporting systems to a level sufficient to ensure compliance with the Amendments to Parts 43, 45, 46, and 49. In February 2022, the delay was granted, moving the compliance to December 5, 2022.
The CFTC determined that Block and Cap Amendments should be implemented one year after the other Amendments to provide adequate time for expected improvements in swap data quality to benefit the periodic CFTC calculation of minimum block and cap sizes. The industry will not recommend the CFTC commence an enforcement action against an entity for failure to comply. The Amendment currently reads for implementation before December 5, 2022. Failure to comply with the Block and Cap Amendments will be enforced as of December 4, 2022, provided that the entity complies with the Parts 43, 45, 46, and 49 regulations that were in effect on January 1, 2021. With respect to the ISO 20022 and UPI data standards, the Division does not believe that this no-action letter necessitates any change to the CFTC’s previously noted intention to require the use of those standards when they become available. The Division currently expects the use of those standards to be required by the CFTC in Q4 2023.
Aiming to reduce ambiguity and operational complexity, as well as to coordinate international harmonization efforts, the CFTC Rewrite introduces updates in four key areas:
- Data attribute names and definitions
- Specific data validation requirements per message type and asset class
- Dissemination rules
- Valid values and allowable formats
In addition, the update has five significant changes:
Multiple Validation Changes
These range from non-substantive wording changes, to revised definitions, to tweaks to the field-by-field validations. One issue is the sheer number of changes being proposed.
Short-Form Exit Messages
The change allows firms to submit only a subset of fields when trying to terminate a position or remove a position submitted in error.
Event Timestamp for Collateral Valuations Dates
There is a requirement to submit Collateral Valuations but no method to distinguish between submitting a MARU (margin update) for the current date versus a correction of an older Maru for a previous reporting date.
Upgrading Event Type
In addition to aligning some of the Event Type codes to align better, the CFTC has thrown in two new Event Types. CORP (Corporate Event) and UPDT (Upgrade), which is an upgrade of an outstanding transaction performed to ensure its conformity with the amended reporting requirements.
Removal of the No Translation Language
The following language has been removed from reporting: No translations or mappings are permitted, i.e., “Yes” or “No” should not be mapped to “True” or “False.”
Some of the new or updated fields that pose particular challenges for firms working toward the December 2022 deadline are Unique Transaction Identifier (UTI), Counterparty Federal Entity Identifier, Action/Type/Event Type, Amendment Indicators, Unique Product Identifier (UPI), and Collateral Fields. The partial adoption of critical data elements (CDE) may also create additional challenges. Other regulators could have their own interpretations of CDE, which may or may not be interoperable.
The CFTC Rewrite provides more guidance on the verification process expectations of swap data repositories (SDR) and reporting counterparties in the new rules. This will address lingering issues with the verification process and cover a diverse range of areas, such as SDRs’ requirements, reporting timelines, error corrections, and verification logs.
Many firms still implement basic reconciliation checks, like all sent data has been acknowledged or negatively acknowledged and appears on an end-of-day report. They also employ rudimentary accuracy checks, or they believe acceptance to an SDR indicates completeness and accuracy. Firms that have not built internal infrastructures to support the verification process face a large in-house build or a less cumbersome effort by integrating with a third party that provides this service. Firms implementing more consultative solutions that can take weeks or months to produce assessments will need to revisit those approaches to produce more timely and automated output.
Written by: Jakub Klosinski, Consultant