![Risk.net](https://www.risk.net/sites/default/files/styles/print_logo/public/2018-09/print-logo.png?itok=1TpHrpuP)
CFTC does the right thing on trade reporting
US regulator finally moves to clean up its own swap data mess
![Alexander Osipovich Alexander Osipovich](/sites/default/files/styles/free_crop/public/import/IMG/618/328618/alexanderosipovich-cutout-15-web.jpeg.webp?h=d55ac3b3&itok=mZtIN51h)
There is a famous quotation, often ascribed to Winston Churchill, that goes: "The Americans will always do the right thing… after they've exhausted all the alternatives." Much the same could be said about the US Commodity Futures Trading Commission (CFTC) and its approach to swap data reporting.
On December 22 of last year, the CFTC issued draft technical specifications for 120 data elements that firms are reporting to swap data repositories (SDRs) as part of their obligations under the US Dodd-Frank Act. It was perhaps the most arcane, impenetrable document the regulator has put out in recent months. But it raised hopes that the CFTC will finally clean up a gigantic mess that emerged out of its own Dodd-Frank rules and, in the end, bring greater harmony to commodity derivatives markets.
Let me rewind to explain how we got here. The 2008 financial crisis was so bad, in part, because nobody had any idea what sorts of systemic risks had emerged out of the vast web of bilateral, over-the-counter derivatives trades that firms had executed with one another. So regulators decided that all those trades needed to be reported to giant databases. By monitoring those databases, regulators would gain visibility into the previously opaque OTC markets.
In the US, those databases were called SDRs, and the CFTC granted the SDRs significant leeway in how market participants would report the details of each trade. That meant the handful of SDRs that emerged each adopted mutually unintelligible templates for swap data reporting.
This made it impossible for the CFTC to make apples-to-apples comparisons of trade data across the different SDRs. Making matters worse, some of the SDRs also took a distinctly relaxed route to validating the data submitted by market participants. If you want to report a swap with an absurdly high notional amount of $1 quadrillion or an underlying commodity called "ASDFGH", you can do it.
As a result, SDR data is riddled with errors and inconsistencies. The CFTC admitted as much in a study published in November, for which CFTC staffers reviewed all trades reported to SDRs over a 12-month period. Among other things, they found that more than a quarter of a million interest rate swap (IRS) and credit default swap (CDS) transactions, representing some $30 trillion in notional volume, had been reported without valid legal entity identifiers, the tags assigned to individual counterparties. And the IRS and CDS data is relatively tidy compared to the data on nonfinancial commodity swaps, which by all accounts is tremendously messy.
Which brings us back to those draft technical specifications that the CFTC released just before Christmas. By putting out that document, the regulator has taken an initial baby step towards imposing order on the chaos of SDR reporting.
Of course, the road ahead will be long and painful – particularly for firms that have grown accustomed to reporting in one format, only to discover the standards have changed. But unless the CFTC does something along these lines, SDR data will continue to be garbled, and swap trade reporting will continue to be a pointless box-ticking exercise for all parties involved.
So the CFTC should be commended for doing the right thing. It's just a pity this couldn't have happened sooner.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Commodities
Foreign funds are bulls in China’s onshore commodity futures
Growing participation from overseas investors is boosting liquidity in what’s already a boom market
Energy Risk Software Rankings 2024: IT demands increase amid rising risk
Heightened geopolitical and credit risk increase requirements on commodities software
Energy Risk Asia Awards 2023: the winners
Winning firms demonstrate resiliency and robust risk management amid testing times
ION Commodities: addressing the market’s recent pain points
Energy Risk Software Rankings winner’s interview: ION Commodities
Energy Risk Commodity Rankings 2023: adapting to new market dynamics
Winners of the 2023 Commodity Rankings provided reliability when clients faced extreme change
Energy Risk Software Rankings 2023: managing uncertainty
Unpredictable markets make CTRM software choices key
Navigating the volatility and complexity of commodity markets
Commodity markets have experienced significant challenges since the Covid-19 pandemic, the conflict in Ukraine and the subsequent sanctions imposed on Russia. These unprecedented events have caused fluctuations in supply and demand, disrupted global…
Energy Risk Asia Awards 2022
Recognising excellence in energy risk management