An Unwanted Sequel? CFTC Proposes to Require Swaps Entities and SDRs to Implement New Data Elements and Other Adjustments in Wake of Trade Reporting Re-write

Only one year removed from implementing the Commodity Futures Trading Commission’s (CFTC) comprehensive swaps reporting overhaul (Re-write), the Commission put market participants on formal notice of its plan to enact another set of significant revisions to its swaps reporting infrastructure. Specifically, the CFTC has proposed adding 49 new data elements to existing Part 43 and 45 swap reporting requirements, in addition to Unique Product Identifier (UPI), data element appendix and technical specification revisions (TR Proposal).^[1]  The CFTC has proposed an ambitious date of one year from the final rule’s issuance for compliance.

If adopted, the TR Proposal will impact not only Swap Dealers, Swap Execution Facilities, Designated Contract Markets, Derivatives Clearing Organizations and other reporting firms (Reporting Entities), who must interpret and implement the additional data elements and incorporate technical specification adjustments, but also Swap Data Repositories (SDR), who first must update their specification messages to enable Reporting Entity compliance and adjust swap data validation systems, among implementing other changes. The TR Proposal follows recent Commission statements identifying swap reporting violations as a persistent issue and vowing to deter future violations with heightened fines and additional remedial sanctions.

Notably, Reporting Entities and SDRs were given two years to comply with most of the preceding Re-write requirements. In contrast, Reporting Entities will now need to undergo a similar compliance process to the Re-write in half that time, beginning with applying the new data elements and technical specifications to their book of business, a process often requiring interpretation. For example, one proposed data element would require the reporting of a “swap pricing method” field for swaps with a floating leg. Accordingly, Reporting Entities will need to work closely with sales and trading desks to understand internal pricing methodologies, as well as review legal agreements to ensure swap reports accurately reflect the economic reality of the trading activity. Comments on the TR Proposal are due by January 29, 2024. 

The TR Proposal raises a number of questions. We identify and address them below and explain how the TR Proposal differs from the Re-write. We also provide an overview of the additional data elements across Parts 43 and 45, detail proposed masking requirements for the commodity asset class, and discuss the timing of the anticipated revisions to swaps reporting requirements.  

Why is the CFTC proposing more changes to its swaps trade reporting regime?

In the press release for the TR Proposal, the Commission states that the proposed amendments are intended to continue efforts towards “international data harmonization” and “ensure the CFTC continues to receive accurate, complete, and high-quality data on swap transactions.”  The effort follows the Re-write’s comprehensive retooling of the CFTC’s swap reporting rules, which were also intended to streamline reporting requirements and harmonize data elements with international reporting standards.  

The need to further harmonize CFTC swaps data reporting with international requirements recently materialized when a new version of the critical data element (CDE) Technical Guidance was published in September 2023. The guidance is issued by an international working group tasked with harmonizing data reporting and its elements globally. To align with this latest guidance, the TR Proposal contains 19 new data elements (Harmonized Data Elements), which include added fields relating to custom baskets, price, notional amounts and quantities, products, and a new crypto-underlier indicator.

Although the Commission is taking additional steps to harmonize swap data elements with international standards, the TR Proposal also introduces CFTC-specific data elements not yet adopted by international regulators. In fact, most data elements introduced in the TR Proposal (30 of 49) would be subject to only CFTC reporting requirements and not harmonized with current international requirements. By introducing these 30 new data elements, the CFTC aims to “enhance data quality, and standardization” and believes the elements are “consistent with [its] mission to promote the integrity, resilience, and vibrancy of the US derivatives markets through sound regulation.”

If adopted, how would the TR Proposal differ from the Re-write?

Although the proposed revisions under the TR Proposal are significant, their impact to the overall swaps reporting regime would not be as comprehensive as the Re-write’s changes.  For example, its proposed revisions would contribute additional data elements to swap reporting requirements, rather than having the net effect of the Re-write, which reduced the number of fields mandated for reporting while adding new “collateral and margins” data elements. In addition, the TR Proposal would not alter timely reporting requirements under either Part 43 (Real-Time) or Part 45 (SDR), among other changes effected in the Re-write. 

Which data elements are proposed to be added to CFTC swaps reporting requirements?

The TR Proposal would add 49 new data elements (Proposed Data Elements) to the existing 128 data elements in Part 43 and Part 45, requiring firms to report 177 data elements, if adopted as proposed. All 49 new data elements would be added to Part 45 (SDR) reporting requirements, with 18 of these also mandated for Part 43 (Real-Time) reporting.

A complete listing of the proposed Part 43 and Part 45 data elements is provided at the end of this alert.

Does the TR Proposal focus on certain asset classes or trade types more than others?  

While some of the Proposed Data Elements apply across all asset classes and trade types, others more closely relate to a narrowed subset of swap activity. For example, Proposed Data Elements in the “Clearing” and “Counterparty” categories would generally have universal application to all transaction types, while other elements are more directly applicable to specific asset classes, such as notional quantity fields, which pertain to trades in the “other commodity” class. 

We highlight certain impacted asset classes or trade types, and provide an overview of other notable data elements below:

• Commodity (traditional) asset class. Seventeen (17) of the proposed data elements directly impact the traditional commodity asset class. Of these 17, twelve (12) would be commodity-specific, requiring additional notional amount and quantity reporting (#s 57 – 68). In addition, five (5) of these 17 data elements fall under the “Product” category and are most relevant to the commodity asset class (#s 124, 125, 131, 132, 133). Other Proposed Data Elements of note for firms reporting commodity swaps include the potential applicability of a new underlying asset trading platform identifier field (#129), and a new index field for underlying baskets containing two or more commodities (#s 32 – 36).
• Foreign exchange (FX) asset class. Entities reporting FX trades will see notable additions, including a data element related to the underlying index used in pricing certain FX derivatives not supported by a UPI (#126), and the large notional off-facility indicator (see below).  Separate from these additional data elements, the CFTC’s Technical Specifications, adopting from the CDE technical guidance, revise the definitions for the Counterparty 1 and 2 data elements (#15, 17) to expressly permit firms to report a fund manager counterparty concerning certain pre-allocated trades.

• Options (all asset classes). Six (6) proposed data elements would be added to provide additional information with respect to options’ strike price and exercise dates. All other options-related data elements would be subject to both Part 43 and Part 45 requirements. The new options data elements would include proposed data element numbers 97 through 99 and 106 through 108.
• Swap pricing methodology. The CFTC is proposing that firms report a “swap pricing method” (#116) for any swap transaction with a floating leg. Market participants should review existing legal contracts and consult with their sales and trading desks to verify the most accurate population for the new field.

• “Cap” election indicator. The CFTC is proposing a “true/false” data element to indicate whether a trade is a large notional off-facility swap (#140). The field would be a separate and additional entry to the “block trade election indicator” (#139) currently in effect. Reporting Entities and SDRs should consider the handling of the field, particularly in light of recent CFTC Letter 23-15, which allows firms to comply with the cap (and block) requirements that became effective on January 1, 2021.
• Virtual currency indicator. The CFTC is proposing a “Crypto asset underlying indicator” (#130) data element for firms transacting in derivatives with a crypto asset underlier. Firms transacting in these products may also need to consider another new data element, “Underlying asset trading platform identifier” (#129), along with its corresponding codes.

How would Unique Product Identifier (UPI) requirements change under the TR Proposal?

Reporting counterparties would be required to report, and SDRs to disseminate, geographically limited Part 43 UPIs for certain trades in the “other commodity” asset class. The CFTC is proposing to make this change to limit geographic references to underlying assets and delivery points, the disclosure of which could enable a counterparty’s identity to be revealed. In effect, reporting counterparties would be required to submit two separate UPIs for certain commodity transactions: one that effectively “masks” counterparty identification pursuant to Part 43, and another which utilizes the Commission’s published UPI under 45.7 (once available).

The change would become effective after a UPI product classification system is designated pursuant to CFTC Rule 45.7.  The TR Proposal does not give a timeline for the anticipated release of “other commodity” UPIs. The deadline for complying with non-commodity asset class UPI requirements is currently set for January 29, 2024.

How would the Data Element Appendices and Technical Specifications be adjusted under the TR Proposal?

The CFTC is proposing a number of changes to Appendices A and 1 of Parts 43 and 45, respectively, as well as to the Technical Specifications. The majority of these changes would incorporate the aforementioned additional data elements. In addition, the TR Proposal would also remove asset class specifications from the appendices, while relocating certain data element definition text into the Technical Specifications. The CFTC is also proposing to revise the data element definitions in its Appendices to more closely align with the Technical Specifications and, thus, the Regulatory Oversight Committee’s CDE Technical Guidance.

When will reporting counterparties be required to comply with the proposed changes? 

A compliance date of one year following the rule’s final publication is being proposed.  Assuming the CFTC finalizes the rule by the end of summer, a plausible timeline in light of the 2024 Presidential election, market participants should anticipate an approximate compliance date in Q2 or Q3 2025. The TR Proposal notes the Commission’s initial belief that a one-year compliance timeline would be sufficient for market participants to adjust reporting systems.  However, the CFTC does request comment as to whether 365 days is an adequate amount of time to implement the proposed additional data elements.

The Re-write initially provided a 1.5-year runway to compliance (except for block and cap amendments to Part 43), later extended via no-action letter to two years following the rule’s release. The extension responded to industry concerns that swap data repositories (SDRs) and market participants needed additional time to review, design, build and test modified swaps reporting systems.

Takeaways

It will be little solace to firms that the TR Proposal is not quite the comprehensive overhaul as the preceding Re-write. The TR Proposal confronts Reporting Entities and SDRs with roughly 50 new data elements, all to be reviewed, interpreted, designed (via systems modifications), tested and implemented within the proposed one-year time period. As one indicator that the one-year compliance timeline is insufficient, the TR Proposal’s cost-benefit analysis suggests that Reporting Entities may need more time to meet the proposal’s requirements than the Commission anticipated in the Re-write’s adopting release.^[2]

The proposal comes at a time when CFTC leadership and its enforcement division have highlighted trade reporting as a persistent problem in swaps markets, recently vowing to deter future misconduct with heightened fines and additional remedial sanctions.  As evidenced in numerous CFTC settlement actions, trade reporting violations often result from the incorrect implementation of swap data elements from the outset of such requirements being imposed.  Reporting Entities should treat the new data elements accordingly, recognizing that SDR specification messages must be closely followed and all data elements accurately submitted to reflect the economic realities of any particular swap throughout its lifecycle to avoid the compounding of inaccurately submitted reports.

To avoid these pitfalls, Reporting Entities should draw on experiences gained from implementing the Re-write, leveraging both internal and external resources. Finally, project timelines should be developed that allow for sufficient testing to occur prior to finalizing the revisions. 

Complete Listing of Proposed Data Elements

The following data elements, organized by reporting category and including their definition and data element number, would be added to the CFTC swaps reporting regime. Data elements subject to both Part 43 and Part 45 reporting requirements are bolded below:

• Clearing (2):
  • Clearing Member Identifier Source (Data Element #5)
    • Definition: Source used to identify the clearing member.
  • Mandatory Clearing Indicator (#14)
    • Definition: An indicator of whether the swap transaction is subject to mandatory clearing under the Commission’s regulations.
• Counterparty (4):
  • Counterparty 1 identifier source (#16)
    • Definition: Source used to identify Counterparty 1.
  • Counterparty 1 designation (#28)
    • Definition: Indication of the reporting counterparty’s designation
  • Counterparty 2 designation (#29)
    • Definition: Indication of the second counterparty’s designation
  • Counterparty 2 special entity (#30)
    • Definition: An indication of whether Counterparty 2 is a special entity as defined in CFTC Rule 23.401(c).
• Custom baskets (5):
  • Custom basket code (#32)
    • Definition: If the OTC derivative transaction is based on a custom basket, unique code assigned by the structurer of the custom basket to link its constituents.
  • Basket constituent identifier (#33)
    • Definition: An identifier that represents a constituent of an underlying custom basket, in line with the Underlier ID within the ISO 4914 UPI reference data elements, as maintained by the UPI Service Provider or in line with an identifier that would be reported as an Underlier ID (Other) where the UPI Underlier ID is ‘OTHER’.
  • Basket constituent identifier source (#34)
    • Definition: The origin, or publisher, of the associated Basket constituent identifier, in line with the Underlier ID source within the ISO 4914 UPI reference data elements as maintained by the UPI Service Provider or in line with the allowable value that would be reported as an Underlier ID (Other) source where the UPI Underlier ID is ‘OTHER’.
  • Basket constituent unit of measure (#35)
    • Definition: Unit of measure in which the number of units of a particular custom basket constituent is expressed.
  • Basket constituent number of units (#36)
    • Definition: The number of units of a particular constituent in a custom basket.
• Notional amounts and quantities (13)
  • USD equivalent regulatory notional amount (#42)
    • Definition: For the entire swap transaction (not leg by leg), provide the USD equivalent notional amount that represents the entire overall transaction for tracking notional volume.
• Note: For Data Elements #57 – 68, the following definitional language applies and should be read to precede each data element definition given below: “For each leg of the transaction, where applicable: for OTC derivative transactions negotiated in non-monetary amounts with a Notional quantity schedule:”
• Notional quantity schedule – unadjusted date on which the associated notional quantity becomes effective (#57)
  • Definition (Cont.): Unadjusted date on which the associated notional quantity becomes effective.
• Notional quantity schedule – unadjusted end date of the notional quantity (#58)
  • Definition (Cont.): Unadjusted end date of the notional quantity.
• Notional quantity schedule – notional quantity (#59)
  • Definition (Cont.): Notional quantity which becomes effective on the associated unadjusted effective date.
• Notional quantity schedule – days of week (#60)
  • Definition (Cont.): Days of the week applicable for the delivery of power.
• Notional quantity schedule – unadjusted effective date of days of week (#61)
  • Definition (Cont.): Unadjusted date on which the associated days of week becomes effective for the delivery of power
• Notional quantity schedule – unadjusted end date of days of week (#62)
  • Definition (Cont.): Unadjusted end date of the days of week for the delivery of power.
• Notional quantity schedule – hours from thru (#63)
  • Definition (Cont.): Hours from through based in UTC applicable for the delivery of power.
• Notional quantity schedule – unadjusted effective date of hours from thru (#64)
  • Definition (Cont.): Unadjusted date on which the associated hours from thru becomes effective for the delivery of power.
• Notional quantity schedule – unadjusted end date of hours from thru (#65)
  • Definition (Cont.): Unadjusted end date of the hours from thru for the delivery of power.
• Notional quantity schedule – load profile type (#66)
  • Definition (Cont.): Load profile type applicable for the delivery of power
• Notional quantity schedule – unadjusted effective date of load profile type (#67)
  • Definition (Cont.): Unadjusted date on which the associated load profile type becomes effective for the delivery of power.
• Notional quantity schedule – unadjusted end date of load profile type (#68)
  • Definition (Cont.): Unadjusted end date of the load profile type for the delivery of power.
• Prices (12)
  • Price schedule – unadjusted effective date of the price (#97)
    • Definition: For OTC derivative transactions with prices varying throughout the life of the transaction: Unadjusted effective date of the price.
  • Price schedule – unadjusted end date of the price (#98)
    • Definition: For OTC derivative transactions with prices varying throughout the life of the transaction: Unadjusted end date of the price.
  • Price schedule – price (#99)
    • Definition: For OTC derivative transactions with prices varying throughout the life of the transaction: Price in effect between the unadjusted effective date and unadjusted end date inclusive.
  • Strike price schedule – unadjusted effective date of the strike price (#106)
    • Definition: For options, swaptions and similar products with strike prices varying throughout the life of the transaction: Unadjusted effective date of the strike price.
  • Strike price schedule – Unadjusted end date of the strike price (#107)
    • For options, swaptions and similar products with strike prices varying throughout the life of the transaction: Unadjusted end date of the strike price.
  • Strike price schedule – strike price (#108)
    • Definition: For options, swaptions and similar products with strike prices varying throughout the life of the transaction: Strike price in effect between the unadjusted effective date and unadjusted end date inclusive.
  • Option exercise end date (#113)
    • Definition: For American or Bermudan exercise type, the last date for exercise.
  • Option exercise frequency period (#114)
    • Definition: The frequency of exercise periods.
  • Option exercise frequency period multiplier (#115)
    • Definition: The number of time units for the exercise frequency period.
  • Swap pricing method (#116)
    • For each leg of the swap transaction where applicable, the method used to price the floating leg.
  • Pricing date schedule of the swap (#117)
    • For each leg of the swap transaction where applicable, the adjusted date(s) on which the floating leg is priced.
  • Start and end time of the settlement window for the floating leg(s) (#118)
    • Definition: For each leg of the swap transaction where applicable, the time settlement window on which the floating leg is priced.
• Product (10)
  • Physical delivery location (#124)
    • Definition: For each leg of the swap transaction where applicable, the specific delivery location associated with the underlying asset for swaps in the other commodity asset class.
  • Pricing index location (#125)
    • Definition: For each leg of the swap transaction where applicable, the specific pricing index location associated with the underlying asset for swaps in the other commodity asset class.
  • Underlier ID (Other) (#126)
    • Definition: The asset(s), index (indices) or benchmark underlying a contract or, in the case of a FX derivative, identification of index.
  • Underlier ID (Other) source (#127)
    • Definition: The origin, or publisher, of the associated Underlier ID (Other)
  • Underlying asset price source (#128)
    • For an underlying asset or benchmark not traded on a platform, the source of the price used to determine the value or level of the asset or benchmark.
  • Underlying asset trading platform identifier (#129)
    • Definition: For a platform traded underlying asset, the platform on which the asset is traded.
  • Crypto asset underlying indicator (#130)
    • Indicator of whether the underlying of the derivative is crypto asset.
  • Physical commodity contract indicator (#131)
    • Definition: For each leg of the swap transaction where applicable, an indication of whether or not the trade being submitted: (1) references one of the contracts described in Appendix B to Part 43; or (2) is economically related to one of the contracts described in Appendix B to Part 43.
  • Product grade (#132)
    • Definition: For each leg of the swap transaction where applicable, the grade of the commodity to be delivered.
  • Maturity date of the underlier (#133)
    • Definition: For each leg of the swap transaction where applicable, in case of swaptions, maturity date of the underlying swap.
• Transaction related (3)
  • Large notional off-facility swap election indicator (#140)
    • Definition: Indicator of whether an election has been made to report the swap transaction as a large notional off-facility swap by the reporting counterparty or as calculated by either the SDR acting on behalf of the reporting counterparty or by using a third party.
  • SEF or DCM indicator (#146)
    • Definition: An indication of whether the swap transaction was executed on or pursuant to the rules of a SEF or DCM.
  • SEF or DCM anonymous execution indicator (#147)
    • Definition: An indicator of whether the swap transaction was executed anonymously on a SEF or DCM.

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[1] “Real-Time Public Reporting Requirements and Swap Data Recordkeeping and Reporting Requirements” (Notice of Proposed Rulemaking), 88 Fed. Reg. 90046 (Dec. 28, 2023). Available at https://www.cftc.gov/sites/default/files/ 2023/12/2023-28350a.pdf.

[2] The CFTC’s cost-benefit analysis estimates that implementing the TR Proposal, if adopted as drafted, would take roughly 1,730 reporting entities an average of approximately 450 – 850 working hours to complete.  Under the Re-write final rule release, the CFTC estimated that roughly 500 – 725 working hours would be needed for approximately the same number of market participants to implement the changes.  See, Real-Time Public Reporting Requirements, 85 Fed. Reg. 75,422 at 75,469 finding an “estimated total of 500 to 725 hours per reporting entity” and explaining that “these costs have been accounted for in the separate part 45 adopting release,” suggesting that 500 to 725 hours was the aggregate estimate for implementing the full Re-write (i.e., both Parts 43 and 45).