ISDA CEO discusses challenges associated with trade reporting requirements for OTC derivatives

Scott O’Malia, ISDA’s chief executive officer, provides insights into how improving consistency within reporting will allow greater transparency for derivatives trading.

In a recent blog post, ISDA CEO  Scott O’Malia provided informal comments on important over-the-counter (OTC) derivatives issues including how ISDA is seeking to make the market safer and more efficient. 

O’Malia highlighted that ongoing regulatory change has been met with the challenge of inconsistency in the way rules were drafter and implemented, which is having an impact on both market participants and regulators.

“Nowhere is this more evident than in trade reporting requirements for over-the-counter (OTC) derivatives, which were put in place to enhance market transparency,” said O’Malia.

“The lack of consistency in what is reported means this objective has not been fully achieved – but with forthcoming rule changes and a new digital approach to reporting, real transparency is finally within reach.”

O’Malia noted that the US Commodity Futures Trading Commission (CFTC) will be the first to experience changes to its swap data reporting rules, which will include critical data elements (CDEs) developed by the Committee on Payments and Market Infrastructures and the International Organisation of Securities Commissions.

The amended rules for the CFTC will first come into effect on 5 December 2022, with similar changes in Europe and Asia-Pacific following in the coming years.

“By adopting the CDEs as part of the update to reporting requirements, jurisdictions can ensure greater consistency in the format of reported data fields,” added O’Malia.

“These standards will help to address some of the issues but will not solve the entire problem – firms also need a robust way to make sure their interpretation and implementation of the rules is accurate and consistent with that of their peers.”

O’Malia suggested that in this instance, a digital approach could help. ISDA’s Digital Regulatory Reporting (DRR) initiative has already seen industry working groups develop a collective, mutualised interpretation of the relevant CFTC rule amendments, which can be transformed into machine-executable code using the Common Domain Model. The process is expected to be completed before the 5 December deadline, ensuring that a critical tool for effective implementation of the CFTC rules exists, alongside providing a roadmap for other jurisdictions that will follow.

“In fact, much of the work being completed now for the amended CFTC rules can be reapplied to rule changes in other regions,” noted O’Malia.

“An estimated 70% of the coded CFTC rules are expected to directly transfer to the DRR that is already in development for reporting rule changes under the European Market Infrastructure Regulation, while as much as 90% of the combined coded US and European rules may transfer to Asia-Pacific.”

According to ISDA, the DRR gives market participants access to an open-source, human-readable, machine-executable expression of the rules that they can use to implement the regulations in a way they know will be consistent with their peers.

In addition, if firms would prefer to produce their own interpretation, the DRR could still be utilised to benchmark that interpretation and check they are on the right track.

“Of course, using a coded interpretation of complex requirements is big change for market participants and they need to be confident they can rely on the DRR to meet their obligations,” said O’Malia.

“To that end, we are working with our members to show how effectively the model works in a real-world, production-level environment, with robust testing of the data that is reported to swap data repositories. We expect this validation to be complete in the coming weeks.”

The DRR, through the development and adoption of international data standards and efforts made collaboratively by market participants, has brought increased transparency within reach of the global OTC derivatives markets.

“We will continue to work with market participants to achieve this goal as regulators in other jurisdictions follow the CFTC with their own changes to reporting rules,” concluded O’Malia.

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