WHAT’S THE RULE? The Commodity Futures Trading Commission on Sept. 1 published a final rule on the standards and core principles that swap data repositories (SDRs) must adhere to under Dodd-Frank, spelling out the guidelines for recordkeeping of swap data. It also establishes rules for conflicts of interest, corporate governance, and the process for analyzing and screening the data.
WHY IS IT IMPORTANT? The SDRs play a pivotal role in the derivatives marketplace because they assemble and disseminate the data for the regulators and the public – which ensures market integrity. It is a highly profitable business that has little competition. In fact, the leading company in this field has a board that is dominated by the large Wall Street banks.
WHAT DID BETTER MARKETS ARGUE? We argued that conflict of interest rules for SDRs should be as strong as those for other players, such as derivatives clearing organizations, designated contract markets and swap execution facilities. Thus, they should have a requirement for independent representation on boards of directors. Better Markets also advocated that the CFTC perform the monitoring and analysis of swap data, and that code terminology used by all SDRs be uniform in their reporting to the CFTC.
WHAT DID THE AGENCY DO? Unfortunately, the agency did not requirement for independent board members, despite the warning of Commissioner Michael Dunn that it would allow for conflicts of interest to continue. The agency said uniform coding of data would be applied on a product-by-product basis, an improvement, but still short of providing comprehensive market oversight. The CFTC agreed with Better Markets that the agency should monitor and analyze the data in-house, but budget constraints could pose a problem, necessitating that the SDRs to perform such duties. One positive note: the agency rejected a bid by the Depository Trust & Clearing Corporation and CME Group that wanted a periodic reporting of the data to the CFTC based on a schedule. Instead, it agreed with Better Markets that data be streamed on a real-time basis.