REFILE-Clearinghouses embroiled in swaps data fight

Fri Jan 11, 2013 4:01pm EST

By Mike Kentz

NEW YORK, Jan 11 (IFR) - The CME Group and Depository Trust and Clearing Corporation are locked in a controversial battle regarding the dissemination of cleared swaps data to regulators and the public, a primary tenet of the G20 regulatory commitments and Dodd-Frank statute, and a rule whose deadline was extended by the Commodity Futures Trading Commission on Thursday.

The CME, one part clearinghouse and another part data repository, has argued since the summer that it should be allowed to funnel proprietary cleared swaps data to its own repository, a proposal it claims will reduce costs and add efficiency to the market while keeping the organisation in compliance with Dodd-Frank.

Meanwhile, the DTCC, an established repository that does not maintain an OTC clearing service, has been arguing that such a framework would reduce transparency and efficiency since data will be fragmented across several repositories and force swap dealers to comply with duplicative reporting requirements.

The debate picked up pace in October when the CME filed a lawsuit against the CFTC after the regulator released documents suggesting the CME would not be able to operate its clearing service and repository in conjunction with each other.

The CFTC subsequently amended the documents to delete that particular language and CME dropped its lawsuit, re-filing an amendment request whose comment period was scheduled to close last Monday. The CFTC extended the comment period at the last minute for one week, at the request of the DTCC.

The request was made because additional language was changed in December that DTCC felt needed more time for the market to digest, Larry Thompson, general counsel at the firm, told IFR. Thompson filed an additional comment letter, the sixth of the period by the firm, last week.

At the crux of the debate is the reporting obligation, which the CME claims should fall on the clearinghouse since when swaps are cleared they are novated into two separate swaps by the exchange and then reported.

CFTC rules placed the reporting obligation with the main counterparty of a swap in the past, but the regulator has been silent on the issue over the last few months. That framework would benefit the DTCC, which has been chosen through industry-led tenders to be the repository of choice across the five major asset classes.

The CME claims its proposed framework would reduce costs for counterparties and add efficiency to markets, as well as satisfying the Dodd-Frank mandate for increased transparency.

"A clearing organisation reporting to its affiliated swap data repository will always be the most efficient equation," a clearinghouse lawyer told IFR.

But some argue the opposite. Swap dealers, who would prefer to report all uncleared and cleared swaps data for a given asset class to one specific repository, would be forced to report certain swaps twice under the CME's preferred framework. Additionally, data collection on the part of regulators would become less efficient, say some industry trade bodies, as they will be forced to aggregate across a plethora of repositories.

Commercially, the CME and other derivatives clearing organisations would stand to profit from the set-up. The CME would, by default, would become the primary repository for counterparties choosing to clear certain swaps at its clearinghouse. The organisation is backed, publicly at least, by fellow clearer InterContinental Exchange, the Commodity Markets Council, and the Working Group of Commercial Energy Firms.

ICE, CME, and a handful of other exchanges are all members of the CMC. The Working Group of Energy Firms does not divulge its membership but is represented by Michael Sweeney, partner at Sutherland Asbill. Sweeney declined to name the Working Group's members.

Suggestions across the market are that CME is the main driver behind the lobbyist group, though a CME source could not confirm whether or not the firm is even a member.

The DTCC's opinion is backed publicly by trade groups the International Swaps and Derivatives Association, the Securities Industry and Financial Markets Association, a group of energy trade associations including the Edison Electric Institute, and swap dealer Deutsche Bank, among others.

"CME proposes to illegally tie CME's SDR and DCO services by requiring its clearing customers as a condition to using its clearing services to have CME direct their cleared trades to CME's own captive SDR," wrote Thompson in his most recent comment letter.

"This proposed tying of services is contrary to the fair and open access core principle set forth for DCOs in the Dodd-Frank Act - the Dodd-Frank Act's prohibition of market infrastructures from engaging in anti-competitive practices-and the US antitrust laws."

The CME, in retort, argues the DTCC is similarly aiming to institute a regulatory scheme that would benefit its own business practices.

"Ultimately, DTCC appears to be dissatisfied with the approach taken in Rule 1001 [CME's request] because that approach does not comport with the scheme that DTCC desires-one in which swap dealers would be able to dictate to clearing organisations the SDRs to which clearers must report [swap data]," wrote Tim Elliott, associate general counsel at the CME in the request.

"Copying an existing file and sending it to another registered entity within CMEdoes not trigger the kind of dire consequences that DTCC seems to fear," he added.

Market participants say the CME's legal interpretation of Dodd-Frank is not necessarily inaccurate and from a commercial standpoint makes sense. But many agree that a proliferation of swaps data repositories, a possible by-product of a ruling in favour of the CME, would fly in the face of regulatory commitments to increase transparency in the swaps market.

The comment period now closes Monday 14 January.

(This article will be published in the Jan 12 issue of International Financing Review, a Thomson Reuters publication; www.ifre.com)

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