Brian Bollen talks to regulatory technology firms about the December implementation of the CFTC Rewrite and what is on the horizon
In late 2022 the CFTC Rewrite hit the industry with a wave of regulatory refits, underpinned by the Dodd-Frank Act of 2010, in an effort to address the lack of accordance in reporting requirements across jurisdictions.
“So far, so good” is one of the early verdicts on its recent implementation from Leo Labeis, founder and CEO of regulatory technology firm REGnosys. The experience has been “a relatively smooth ride, compared with 10 years ago,” he adds.
For more background, the Commodity Futures Trading Commission (CFTC) in the US was the first institution of its kind to implement requirements for the reporting of over-the-counter (OTC) derivatives to a registered trade repository. This was one of the first region-wide responses to the Financial Crisis.
Some will date the Financial Crisis back to the days in July 2007 when the US commercial paper market began to show signs of malfunctioning. Others will date it to September 2008 when Lehman Brothers imploded. For the sake of this article, we will settle on 2008.
“Transparency became crucial” when the industry first digested these requirements, explains Brock Arnason, founder and CEO of Droit. “There was a significant shift in the way that people thought OTC derivative markets should function and be regulated.”
One year later, in 2009, “the G20 Summit called for OTC derivatives transactions to be reported to trade repositories and made available to regulators, with the goal of improving transparency and lowering systemic risk,” recalls Kate Delp, executive director and general manager of DTCC’s US data repository.
“In implementing the G20 commitment, each country drafted their trade reporting rules, leading to different requirements and interpretations of how derivatives should be reported and what data fields should be included,” she continues.
At this time, there was an emphasis placed on knowing which transactions would take place in near real-time and the relevant data surrounding each transaction. Complicating matters was a widespread lack of consistency in this data, partly arising from blurred definitions of the required fields.
Lack of clarity in the overarching rules led to differences in application, preventing regulators from comparing and analysing accurately and confidently. There to help was Arnason’s Droit, which was conceived in the wake of the 2008 Financial Crisis and developed amid its resulting regulatory changes.
“It became clear that the right technology, if used to facilitate the implementation of industry consensus on regulatory interpretations, could help financial institutions meet these new requirements, while mutualising some of the associated implementation costs,” Arnason explains.
For more than 10 years, Droit’s Adept platform has enabled financial institutions to make transparent and auditable real-time decisions around pre- and post-trade compliance, including transaction reporting eligibility, report generation and validation. To keep up with the 2022 Rewrite changes, Droit introduced updates to the validation and report generation components of its transaction reporting product.
“We deployed updates to clients around mid-August 2022,” Arnason outlines. “This gave them time to test the new structure and validation rules. They have either gone live, or are about to launch our product. The implementation of CFTC Rewrite has gone well for them because we enabled them to prepare properly, but this is just step one,” he clarifies.
Surfin’ (beyond the) USA
With Arnason’s comments in mind, what will the future hold, what could ‘step two’ entail? REGnosys’ Labeis points to digital regulatory reporting (DRR) as one way to glide through the current waves of the Rewrite. “DRR is a simple idea based on three pillars,” he explains. “Standardisation, collaboration and integration.”
With DRR, firms that have previously operated in silos, duplicating effort and increasing expense, can instead work together to codify the reporting rules. It is hoped this will lead to the mutualisation of costs as institutions pool resources.
DRR participants continue to collaborate on REGnosys’ Rosetta platform to build an open source, standardised and machine-executable interpretation of the CFTC Rewrite rules.
“The CFTC Rewrite was an acid test to see whether this could work,” Labeis says. “DRR is now expanding to the number of other jurisdictions that are implementing similar changes to their regulatory regimes by 2024.”
Good vibrations
Dissecting the effects of the Rewrite requirements more broadly, Labeis says: “The CFTC, first to act in ‘wave one’, is the first to have revisited its reporting regime. A decade after the initial implementation of imperfect regulation, we are now entering ‘wave two’ of this movement, as regulators ask if the industry can do better. It will affect every financial institution that is active in the US.”
In addition, he affirms that because of its wide-reaching nature, it will take several months of data study before the picture becomes clear.
This comes amid “a global landscape full of fragmented reporting requirements across jurisdictions, raising the cost, complexity and operational risk of trade reporting,” outlines DTCC’s Delp, which, she adds, “hinders the ability of regulators to monitor and mitigate systemic risk.”
Delp’s comments come just one month after DTCC posted its 2023 Systemic Risk Barometer Survey, which predicts that geopolitical trade tensions and resulting inflation will be the primary threats to the financial services ecosystem this year. Inflation, on top of rising operational costs, was considered a key risk by 61 per cent of survey participants — a considerable rise from 34 per cent in last year’s survey.
However, despite these external yet ever-present pressures, Delp states: “From DTCC’s perspective the implementation has been very successful, due to regulatory and industry efforts and collaboration.
“The postponement of the original compliance date gave the industry time for more thorough end-to-end testing, contributing to the success of the implementation.”
She adds: “DTCC has advocated for data harmonisation, within jurisdictions and across the globe. In North America, we have been working closely with the CFTC, as well as the U.S. Securities and Exchange Commission and all 13 Canadian regulators, to ensure that, where applicable, the relevant changes are made across North American jurisdictions.”
The next major reporting regime to continue the alignment process will be the European Markets Infrastructure Regulation (EMIR), where the planned Refit will be driven by European Securities and Markets Authority regulations, as well as those from the UK Financial Conduct Authority.
In APAC there are a number of planned regional updates, including in Singapore and Hong Kong. The majority of these changes will take effect in 2024 — all part of a larger trend towards standardisation. When it comes to large-scale implementation programmes, this looming date is not far away.
“The pace of change has only increased, and much more change lies ahead,” Droit’s Arnason warns. “The firms that are best positioned are those that are investing in flexible technology, allowing quick adoption of industry consensus and best practice.”
For DTCC’s part, Delp highlights: “As global regulators look to implement their own revised trade reporting rules, DTCC will continue to support this effort by engaging with global regulators, market participants and industry standards-setting bodies to ensure continued consistency toward the goal of data harmonisation.”
