The following was contributed by Alan McIntyre, Regulatory Specialist at Quorsus
I happened to be working in Canary Wharf when Lehman Brothers collapsed. I clearly recall the sense of drama. The sadness as shocked Lehmans staff filed out with their possessions in boxes. Television news crews vying with each other to get the Thomson Reuters ticker in the backdrop behind their reporter. Everyone holding their breath wondering how bad the contagion would be. But the bated breath not hindering people fervently discussing who else was in trouble as bank share prices tanked and the former Masters of Universe were revealed as not only mortals, but also mortal.
And I was in New York on a business trip (remember those?) when the film of Martin Lewis’ excellent book about the same crisis came out. I had a rainy Sunday to myself and ticked off a minor bucket list item by going to an arthouse cinema in ‘the village’. A funny, moving, utterly gripping film about a banking crisis that managed to make CDOs sound sexy. Margot Robbie in a bath sure helped.
The road much travelled
In between the 2008 financial crisis and 2015’s The Big Short, a lot happened. Including;
- The 2009 Pittsburgh summit
- The creation of the Financial Stability Board (FSB) in 2009
- The CFTC rolling out Dodd-Frank Act (DFA) reporting of swap data in 2013
- Australia starting ASIC reporting in 2014
- Europe establishing EMIR reporting in 2014
Since 2015 there have been several transaction reporting developments, including KRX reporting in South Korea, SIX reporting in Switzerland and other milestones that may or may not feature an X.
Hogging the limelight
Despite the high number of transaction reporting milestones across the G20 countries, Europe has had more than its fair share of the attention. ESMA has led several revisions to EMIR including the 2017 rewrite of the technical standards and the inflight EMIR REFIT. There was the 2018 introduction of MiFID II reporting and the ongoing SFTR implementation. SFTR not content with being the most comprehensive attempt to shine a light on the so-called ‘shadow banking’ world of Securities Finance, it is also showboating with the G20’s first soup to nuts implementation of ISO20022. SFTR for the first time mandates the exact ISO20022 based XML schema that must be used for all SFTR report submissions and subsequent processing at the Trade Repositories.
Like Donkey, in the film Shrek, jumping up and down shouting, “Pick me! Pick me!” Europe has demanded plenty attention over the last few years. However, that attention is starting to wander back across the Atlantic.
Crossing the Pond
In the absence of being able to stroll around Macy’s or eat buffalo chicken wings in Bryant Park, I can still get my Americana fix by following several regulatory agendas. [Note to self, Netflix might have been easier].
First up there is the CFTC ReWrite. The CFTC is completing a series of consultations that will allow it to revise the swap data reporting rules rolled out in 2013. To get all specific: the CFTC is busy rewriting (deep breath) Part 43, Part 45 and Part 49 of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Little wonder that the industry settled on ‘CFTC ReWrite’ and for the remainder of this article, let’s agree on ‘DFA’ for the Dodd-Frank Act.
Anything you can do
Next up we have the SEC’s part of the DFA, which is known to its fans as SBSR or Security-Based Swaps Reporting. The US regulatory framework essentially splits the supervision of OTC derivatives between the CFTC, which owns the majority, and the SEC, which owns the stuff relating to single traded securities. Specifically, the SEC is responsible for the swaps data reporting where the swap pertains to a single equity or single credit security. Because, as the Securities Exchange Commission, it was already in charge of the trading of those securities.
For reasons that are too long to go over in this piece (and are not entirely clear anyway), the SEC was expected to roll out SBSR reporting way back in 2015 but never quite managed to pull the trigger. After a lengthy hiatus they surprised us with an early Christmas present by announcing on the 18th December 2019, that they had adopted actions to start rolling out SBSR.
The SEC rules came into effect on the 6th of April this year with an approximate 18-month implementation timeframe to allow for the registration of Trade Repositories (known as Swap Data Repositories in the US jargon) and to allow the reporting firms to get ready. The CFTC is expected to finalise its rewrite in the final quarter of 2020 and a 12-month implementation period would result in the two parts of the DFA reporting commencing around the same time. Though there are industry murmurings pressing the CFTC to consider a longer 18-month implementation time period to accommodate the impact of the COVID-19 pandemic among other things.
Poutine or Hamburger
Looking to the north, the Canadian regulators are paying close attention to the CFTC rewrite and are expected to revise their own OTC derivatives reporting rules accordingly where they agree their US counterparts have made good progress towards higher quality reporting. We’d expect the discerning Canadians to adopt the tastier parts, the hamburger, and go their own way, the poutine, where they feel there is a better recipe for improving the data quality.
Under the spotlights
What does this all mean for the banks and reporting firms?
First and foremost, there is a lot to do. The banks, reporting firms, technology vendors and let’s not forget the Swap Data Repositories that are involved the CFTC reporting part of the DFA need to substantially update, revise and reconfigure their reporting solutions and controls frameworks.
The same types of firms that are caught by the SEC’s reporting slice of the DFA need to either dust down SBSR reporting programmes that have years’ worth of dust on them. Or more likely pretty much start new programmes from scratch. After all, some of the talent that worked on the original SBSR plans will have moved on to new departments, new employers or even new lives. Factor in that the infrastructure and systems documented in the original SBSR blueprints will also have moved on substantially and updating those original plans might be more work than starting afresh.
The timeline for any Canadian rewrite is less clear at present. But it’s a relatively safe bet that the momentum building around the CFTC and SEC reporting will spill over into the Canada reporting projects. The US and Canadian banks tend to be closely aligned and operate in both countries. And the reporting regimes are so similar that having just delivered a successful CFTC rewrite project is pretty much the ideal resume item for then working on the Canadian equivalent.
Expensive European Imports
At the risk of undermining my previous argument, one other observation intrigues me here. The sheer volume of European transaction reporting projects coupled with far more demanding rules in Europe has resulted in some of the world’s biggest banks having much bigger transaction reporting teams in Europe than they maintain elsewhere. Some of the banks are essentially running a lot of their CFTC, Canadian and even global reporting out of their European sites. Because that’s where bulk of the technology, the regulatory operations and the reporting expertise has gravitated. It will be interesting to see how much of the upcoming US reporting projects are led or supported from London. Fish ‘n’ chips rather than hamburger and poutine anyone?
The views represented in this commentary are those of its author and do not reflect the opinion of Traders Magazine, Markets Media Group or its staff. Traders Magazine welcomes reader feedback on this column and on all issues relevant to the institutional trading community.