The Commodity Futures Trading Commission (CFTC) has backtracked on swaps rules regarding the bundling of clearing and reporting services, sparking an angry response for post-trade services provider the Depository Trust and Clearing Corporation (DTCC).
The US futures regulator had recently indicated that entities offering clearing and data repositories services for OTC derivatives would not be able to link the two services together.
The Chicago Mercantile Exchange (CME) Group, which will offer OTC derivatives clearing, received approval to operate a swap data repository (SDR) last week. It had filed a law suit against the CFTC regarding the rule, accusing the watchdog of breaching its mandate.
The suit has now been dropped after the CFTC reversed its stance, provoking a furious reaction from DTCC, which also has approval to operate a SDR but will not offer swaps clearing.
“The industry has spent hundreds of millions of dollars to be fully prepared to meet reporting obligations that will become effective in one month,” read a DTCC statement. “The Commission's action late yesterday was an unexplained and an abrupt reversal of course. This action is inconsistent with the Commission’s previous actions, and will cause market participants to question the finality of any Commission rule or interpretation.”
It added that the shift in direction would disrupt the progress of OTC derivatives reform under the Dodd-Frank Act and urged the CFTC to reinstate guidance that gives market participants the ability to choose who they report trades to.
The growing tension among SDR operators highlights the competitive battle emerging across the swaps world for market activity.
“What’s really at play here is CME’s reluctance to give up market share and particularly to share data, which gives it a competitive advantage,” said Mark Steadman, senior manager at consultancy Sapient Global Markets.
If trades cleared at the CME were reported to a competing SDR such as DTCC or IntercontinentalExchange, which will offer clearing in addition to a reporting facility, it may offer rivals a competitive advantage at the expense of the CME.
However, most market participants believe the broader implications of the CFTC’s action would be harmful to the overall aims of swaps regulation.
“This is a sudden reversal by the CFTC that could delay Dodd-Frank implementation even more and opens the door for a fragmented data reporting regime,” said Jamie Lake, principal consultant at Greyspark Partners. “The fact that the change also appears to be somewhat of a knee-jerk reaction will also create a further degree of uncertainty among market participants.”