Derivatives (or swaps) trading was traditionally OTC (over-the-counter) between counterparties. One counterparty was generally a bank or other financial institution. A financial institution could sell a derivative for one price while a rival institution might offer the same swap for a different price. Polling multiple institutions in the market for pricing could be time consuming, leaving market participants unsure of a standard price. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) sought to change that by creating Swap Data Repositories (SDRs) designed to bring about a new market transparency and price discovery by providing a central facility for swap data reporting and recordkeeping. Under Dodd-Frank, all swaps, whether cleared or uncleared, are required to be reported to registered SDRs. All swaps traded through registered clearing houses, as required by Dodd-Frank, will report swaps data directly to a registered SDR. Any entity that seeks to perform the functions of a SDR by any means or instrumentality of interstate commerce, must apply to the CFTC to be registered as a SDR.
In 2012, the Commodity Futures Trading Commission (CFTC) handed down rules to determine how an entity can become accredited as a registered SDR. SDRs are required to be sanctioned by the CFTC, and accede to all of its rules, which principally aim to bring out the accurate and real-time public reporting of swap transaction and pricing data. The anticipated impact on the derivatives market is to provide price transparency and therefore additional liquidity in the market.
These are requirements in the SDR accreditation process. An entity must:
- Accept data;
- Confirm the data accuracy with both involved parties;
- Maintain the data;
- Provide direct electronic access to the data to the CFTC;
- Provide any public reporting;
- Create automated systems for data monitoring and analysis;
- Protect the privacy of the data;
- Make the data available to other specified regulators;
- Establish procedures to access the data in case of an emergency.
Once registered, SDRs must comply with the following mandates:
- Submit an annual amendment on Form SDR (this form elicits documents and supporting information to help CFTC determine an SDR applicant’s status) to be filed within 60 days of the end of the fiscal year.
- Electronically submit an annual compliance report to the CFTC not more than 60 days after the end of the registered SDR’s fiscal year.
- Provide the CFTC with quarterly financial statements.
Although the CFTC has provided all accreditation requirements, the granular details of SDR data collection and reporting remain under construction. If your entity is interested in finding out more about SDRs and how they will benefit your entity or trades, or if you wish to learn how to register as an SDR, please review the CFTC website or contact Taylor Louis LLP.