Earlier this year, the Commodity Futures Trading Commission (CFTC) extended the deadline for financial institutions to comply with its rewrite of swaps reporting rules – known as the "CFTC Rewrite" – from 25 May 2022 to 5 December 2022. The amendments, which became effective in January 2021, aim to improve data quality and the new deadline has afforded firms valuable time to review their reporting practices.
The CFTC Rewrite is just one of several upcoming changes to global trade reporting regimes. One challenge facing financial institutions is the lack of standardisation across regions. This has led to a duplication of processes, increasing the cost, complexity and operational risk of trade reporting.
Thankfully, greater collaboration across the industry is now addressing this fundamental issue. The Digital Regulatory Reporting (DRR) programme has emerged as an important tool to facilitate the compliance process, with an initial focus on the CFTC Rewrite.
This post is intended to assist firms looking to leverage DRR for their CFTC Rewrite implementation. It retraces the origin of the amendments and explains how DRR addresses them.
The transparency requirements for OTC derivatives transactions, first enacted as part of the global financial reform at the G20 Summit in 2009, triggered multiple overlapping requirements across jurisdictions.
The US was the first to implement those changes with the Dodd Frank Act. The current CFTC requirements have been in place since 2012 and other jurisdictions followed in subsequent years. A decade on, these reporting regimes are now being reviewed and the CFTC Rewrite is the first major overhaul within the G20.
The amendments are born out of the drive to achieve greater harmonisation between jurisdictions and higher data quality. The CPMI-IOSCO working group of global regulators has been at the heart of this shift, creating common data standards for use across all derivatives reporting regimes. In 2018, the group published its Critical Data Elements (CDE) to work alongside other common standards including the Unique Product Identifier (UPI) and Unique Trade Identifier (UTI).
The intention was then for each national regulator to implement these standards as they review their regimes. The first phase on the CFTC Rewrite this year adopts the CDE and UTI, with implementation of the UPI to follow in 2023.
Not every regulator is adopting the standards in precisely the same way. But even if this might not align exactly with the working group’s initial intentions, it is undoubtedly a significant improvement on the existing disjointed landscape.
DRR is a global industry-led programme to mutualise the cost of interpreting and complying with reporting requirements. Rather than each firm performing their own interpretation, DRR allows them to standardise that interpretation, encode the rules into a "model" and store it in a digital, openly accessible format. This is a marked shift from the current process where individual firms perform their own interpretation, which they maintain in paper format or perhaps on a spreadsheet. As such, it is a valuable mechanism to mitigate any divergence between jurisdictions.
By building a common set of rules for the new data attributes such as CDE, DRR enables firms to amortise investment in reporting quality across multiple regimes. Firms can reach a consensus on how to report those attributes, which they can apply not only to the CFTC Rewrite but also to other jurisdictions’ future updates.
As a fully composable model, DRR allows effortlessly to handle each jurisdiction’s variation in how they apply the standards. Rather than implementing the specific CFTC requirements in silo, it can encode the variations on top of the existing CDE rule, for instance.
DRR also digitises the regulators’ sample trade scenarios that they may provide in their technical specifications (usually as PDF documents) to illustrate the workings of the rules, as is the case with the CFTC Rewrite. DRR stores those scenarios as synthetic data samples which firms can use to test their implementations and demonstrate that it performs as expected against the rules.
On top of the common rules and the CFTC-specific logic, extensions are built for reporting into each of the trade repositories.
Historically, each trade repository required reporting firms to submit data in a specific format that they determined, before applying their own data transformation for consumption by the regulator. The mandating of the ISO 20022 format, consistent with a push for more standardisation, changes that process by shifting the responsibility from trade repositories to the reporting firm. Going forward, each firm will be required to report to the trade repositories directly in the ISO 20022 format. Although, in the CFTC Rewrite case, that mandate has been postponed to 2023, DRR will ease that process in future by also standardising the transformation into ISO 20022.
The CFTC Rewrite build in DRR started in late 2021 under ISDA’s sponsorship as the trade association for the derivatives market. It is now largely complete with over [90%] of the CFTC reportable fields covered. The DRR model is now undergoing a quality assurance process to ensure it is a complete and accurate representation of the rules. Firms have a role to play in this and should continue to engage with trade associations on the development and validation of the output. Once they sign off on the model, reporting participants will be able to use it as a resource for their internal production build. In Q3, further testing will ensure that the content the model is producing is in line with the trade repositories’ expectations.
As firms enter into the last stretch of their own build, they must now prepare for a full end to end test in the context of their implementation choice. Firms can leverage DRR by either building their own system on it or deploying a third-party platform that does, such as REGnosys’ Rosetta. They can also benchmark their own implementation against Rosetta’s test version, which is the same platform that DRR participants collaborate on to build the rules in open source.
In either case, their systems will need to undergo rigorous user acceptance testing – and firms should aim to begin this as early as possible to ensure it performs against the requirements and is fully embedded ahead of the December deadline.
Ultimately, this year’s cross-industry effort to tackle the US regime will have a major impact on future regulatory reporting practices. Where previous collaborative ventures have run against the lack of effective tools, DRR equips the sector with the necessary capabilities to work together in open source. The CFTC Rewrite is the first and crucial implementation of this new approach. Firms which invest now will have a strong foundation for subsequent amendments, including EMIR Refit coming next year.
REGnosys can support reporting firms through this journey, including the end-to-end testing phase of the CFTC Rewrite preparations and the move into production. To find out more about our Rosetta platform and how we are working with firms to prepare for the CFTC Rewrite, you can read about our technology here or get in touch for an initial discussion.
23 November 2022
ISDA launches full open-source version of Digital Regulatory Reporting model