A decision by U.S. regulators on Wednesday will allow CME Group to report derivatives trades to its own swaps data repository, a move that was fiercely opposed by the Depository Trust and Clearing Corp.
The Commodity Futures Trading Commission ruled four to zero late Wednesday that exchanges like the CME could send data to its own repository to comply with the tough new derivatives regulations, as The Financial Times and several other media outlets reported.
The decision has sparked a war between two titans, DTCC, a large industry post-trade processing utility owned by Wall Street’s banks and brokers, and the CME, the world’s largest derivatives exchange operator.
DTCC has accused the CFTC of inconsistent rulemaking in allowing the CME to bundle its execution and clearing services for derivatives with swap data reporting.
The controversy heated up in January when DTCC held a press conference about the CFTC considering proposed CME Rule 1001, which it said would tie CME’s swap data repository and clearing services and eliminate the ability of market participants to choose their preferred SDR.
Regulators are requiring banks to transmit their derivatives deals to data-warehouses that will store all the prices from buyers and sellers. Swaps data repositories or SDRs are a key part of the Dodd Frank Wall Street reforms, as they are intended to provide regulators with transparency into the more opaque off-exchange derivatives market that led to the financial crisis.
The futures exchanges are vertically integrated so they can do executions clear trades and sell market data, in a one-stop supermarket. DTCC has accused the CFTC of allowing the CME to tie clearing to its “captive” swaps data repository, which is anticompetitive and contrary to the ‘open access’ model for swaps reporting envisions under Dodd-Frank.
Neal Wolkoff, a former C-level executive with three exchanges, who is now a lawyer with Richardson & Patel, wrote a prescient blog analyzing the conflict on Saturday, March 2nd, before the CFTC made its decision.
“This is a collision between the Dodd-Frank model of “open access” swaps markets and “closed access” futures markets presents a stark choice for regulators: Enhance market competition or regulate the derivatives markets in the best way possible.
Although Title VII of Dodd-Frank specifically directs that the trading and clearing of swaps be done in an “open access,” or fully competitive model, Congress and the CFTC have also chosen time and again to retain a “closed access” model for listed futures, and they have done so with a complete understanding of the limits their choices place on competition. Dodd-Frank did not specifically extend the “open access” provisions to Swaps Data Repository (SDR) services, and it did not condition or limit a “closed access” market participant from using its futures-related assets to build a successful “open access” market to trade or clear swaps. As such, CME is assertively seeking to take advantage of the benefits its traditional marketplace can bring to its success in the swaps markets.
I reached out to Sean Owens, director, fixed income research and consulting at Woodbine Associate, to get his take on the CFTC’s decision. Owens pointed to CFTC Commissioner Scott O’Malia’s response to the vote. According to Owens, “What is most important to most market participants is the ambiguity that still exists with Part 45 reporting requirements and responsibilities (as explained by Commissioner O'Malia in his statement on the decision). Amending that part of the regulation to clearly identify and delineate reporting responsibilities would eliminate much of the current uncertainty as we approach the first phase-in deadline,” stated Owens in an email.
In his statement, O’ Malia said:
“Although I agree with the policy outcome of allowing CME to choose which Swap Data Repository (SDR) will receive data on cleared swaps, I am abstaining from the vote on this rule because approval of this rule without an amendment to the Commission’s Part 45 regulations will lead to further confusion with respect to reporting requirements for cleared swaps.”
While this is extremely complicated, O’Malia weighs into the discrepancies of Part 45.3 and Part 45.8 showing there are differences in the reporting requirements, and who has the authority to report the data, depending on the counterparty and whether the trade takes place on a SEF or a designated contract market (DCM).
But, while this battle rages on and points to the confusion and complexity in the rulemaking, don’t be na´ve in thinking this is all about transparency and saving the world from the next crisis. After all, there is money to be made in offering a swaps data reporting as a service.
DTCC operates a rival datawarehouse and sees that CME is encroaching on its turf. DTCC’s global OTC derivatives trade repositories record more than $500 trillion in gross notional value of transactions made worldwide across multiple asset classes, according to its own press release.
In the end this matter needs to be resolved since mandatory clearing of interest rate swaps is due to take affect on March 11, this coming Monday. As DTCC pointed out in January, the industry has spent hundreds of millions of dollars to be fully prepared to meet reporting obligations.
One solution would be for CME to report swap trades to other SDRs, at the request of the customer. But Wolkoff suggests that if there were a charge, customer might not want to.
By allowing multiple SDRs to exist DTCC has argued that swaps data will be fragmented, making it harder for regulators to aggregate the risk across product types, currencies and geographies. But Dodd frank did create a framework that allows for multiple SDRs to exist. But with Big Data technologies and analytics, regulators could pull all the data together, if they had the resources and the skills.