December 5 marks one year since the reworking of the US swap data reporting rules, known as the CFTC ReWrite, went live. Coming nearly ten years after the Dodd-Frank reforms led to OTC derivative reporting being introduced, the ReWrite implementation was a wholesale overhaul of the reporting rules. But the changes are by no means done yet. In this article, we will review how it’s going so far and what lies ahead.

More reporting clarity

The original CFTC reporting implementation involved ‘principles based’ standards where the regulator published the minimum key fields (primary economic terms) that should be reported and largely left the industry to determine the remainder of fields and values that should be reported. The 2022 ReWrite flipped this on its head. The CFTC published detailed message specifications, outlining the fieldnames, definitions, permitted values and the conditionality/applicability of each of the 128 fields. Additional guidance provided further clarity and solidified the transition to a very prescriptive reporting standard.

This has been beneficial for reporting firms as there is more clarity around what the regulators are expecting.

However, as is often the case, the devil is in the details and three main issues persist:

• Errors or contradictions in the technical specification requiring either the CFTC to update the specification or trade repositories to implement temporary workarounds
• Interpretation issues where different people can read the same text as meaning very different things
• The technical specifications were only intended as the bare minimum of rules to be met but this can lead to a mindset that anything additional isn’t required

Under Pressure – Part 49

The CFTC deliberately upped the ante with the ReWrite by including the much-discussed Part 49 rules. These rules are aimed at enforcing high data quality and ensuring firms proactively remediate reporting issues through:

• Verification of the accuracy and completeness of their reported data
• Correction of any issues within seven days
• Notification to the CFTC of any issues where correction is not possible within seven days

Other regulators have error and notification requirements but the CFTC’s Part 49 rules are without a doubt the most formidable. However the lack of any materiality around what constitutes a serious enough issue to warrant a CFTC notification has led to much stress and debate.

There has been a lot of discussion around what the CFTC is doing with all the notifications it must be receiving and whether its staff are prepared to deal with the increased workload. Kaizen recently conducted an industry survey regarding how firms interpret and operationally deal with the Part 49 rules. Some 73% of the swap dealers that participated had not received any feedback or questions from the CFTC on the notifications they had submitted to date.

But then perhaps the threat of having to submit a notification to the CFTC was the point in itself. Fix your reporting data quickly or tell us why not, will inherently put firms under pressure to prioritise anything related to improving the data quality of their reporting.

 Serious about enforcement

The CFTC has been by far the most active regulator in the derivative reporting space when it comes to enforcement actions. Where some of its peers are relying on admonishing firms behind closed doors, the CFTC has publicly fined more firms for swap data reporting issues than the rest of the regulators collectively. The recent eight-figure fines have caught the attention of the industry and signalled that the US regulator isn’t messing around.

The CFTC also recently announced enhanced enforcement powers that include;

• Civil Monetary Penalties - increasing fines to achieve deterrence, especially when the penalty is to a repeat offender.
• Admissions - removal of “neither-admit-nor-deny settlements”.
• Monitors and Consultants - the Commission can appoint a third-party to oversee remediation efforts.

Remediation and increasing compliance are very costly, difficult, and often lengthy programmes. The prospect of having a CFTC mandated third party on-site looking over a firm’s shoulder and saying “that’s not good enough” will be an alarming prospect for many firms.

The road ahead

Despite the past year’s mammoth changes, more is to come:

• January 29 2024: Next month sees the implementation of the long-awaited Unique Product Identifier (UPI) in the CFTC ReWrite Phase 2. This completely overhauls the taxonomies for how to describe the various swap derivative products.
• July 1 2024: The delayed Block Trade Size and Capping Rule amendments for CFTC Part 43 following a recent No Action Relief letter.
• Further ahead is the adoption of UPI for the commodities asset class. This was de-scoped for the January 29 release. We assume this is at least a year away.
• Presumably around the same time is the introduction of ISO 20022 messaging. Also de-scoped from the January 29 release, the CFTC wanted to wait for UPI to be supported on commodities as well as the other asset classes.
• The CFTC also circulated a technical specification update to trade associations earlier this year containing 47 newly proposed fields. Somewhat counterintuitively after just harmonising its reporting to internationally agreed standards, the CFTC appears to be considering adding a large number of fairly bespoke data fields into the mix.

Happy first birthday CFTC ReWrite 

After a great deal of preparation and implementation effort, the CFTC ReWrite reaches its first birthday. The clarity and specificity of the technical specification gives reporting firms a much clearer understanding of what the regulator wants to see. The onerous Part 49 rules combined with the CFTC’s increasing usage of its enforcement powers will encourage firms to continually strive to improve their reporting. It’s also clear that the job is by no means done with four or five more major changes lined up over the next couple years.

Happy first birthday CFTC ReWrite. Fingers crossed this time next year doesn’t signal the onset of the terrible twos!