New swaps reporting requirements released for public comment Wednesday by the Commodity Futures Trading Commission (CFTC) could stop large-scale harmful trading activity, according to one leading industry commentator.
Will Rhodes, principal and director of fixed income for consultancy TABB Group, said the CFTC could wield great power with detailed trade data they are proposing to collect as part of Dodd-Frank Act reforms for the swaps market which aim to monitor systemic risk in over-the-counter (OTC) derivatives trading.
“In the instance of the JP Morgan whale trade, if the CFTC had any sort of real-time trading data, they would be able to see an enormous amount of liquidity was being dominated by one single institution,” said Rhodes.
Firms looking to register as swaps dealers under the new regime will be required to submit around 200 pieces of data for every swap trade, whereas the figure will be around 60 for futures trades. Rhodes suggested this divergence, which may normalise in the coming months, could lead to uneven reporting and a further migration of flow to futures contracts to avoid the tougher reporting requirements.
“For two product sets with similar risk profiles, the CFTC will collect and monitor data from vastly different data sets. This could cause issues for analysing systemic risk as data will be significantly weighted for one asset class over the other,” said Rhodes. “The CFTC will have trouble mining the data because they don’t have the technology or man power to do so, but the fact that this reporting exists means traders will air on the side of caution and it will become a self-regulating function of the market.”
Although Dodd-Frank requires the CFTC to publish two reports per year on trading, clearing, participants and products in the swaps market, the agency is also intending to publish a weekly report, available at 3.30pm Wednesdays, from Spring 2013.
Howard Tai, analyst at consultancy Aite Group, said firms were already in the midst of preparing systems for the increased reporting, which he believes will increase costs in the short-term but lead to efficiencies in the market and greater investor confidence.
“The CFTC’s intent is to see the aggregated OTC swaps positions across asset classes from various market participants. This way it can serve as a good gauge for the overall market exposure, by end-user groups, asset classes or instrument type and potentially serve as an ‘early warning’ system should one or more of those positions become lopsided relative to available market liquidity,” Tai said.
New CFTC rules forcing firms with high levels of swaps trading activity to register as swaps dealers or major swaps participants that came into force 12 October were delayed until 31 December, giving the authority time to re-assesses the categories, which would have included some asset managers in the same group as banks, creating uneven reporting and compliance issues.
Since October, volumes of swaps trading has decreased in line with a dramatic increase to futures trading to avoid high trading costs related to the increased reporting demands. Derivatives venues in the US have also created exchange-traded products that replicate swaps exposures to facilitate this movement, namely the Chicago Mercantile Exchange, IntercontinentalExchange and Markit.
The public consultation on the proposed reporting rules will close on 14 December.