Editor’s Note: On March 6, 2013, the CFTC approved CME Group Rule 1001. On May 2, 2013, DTCC filed a lawsuit against the CFTC, citing a failure to consider the anticompetitive effects of its rules.
A major storm is brewing in the typically sleepy world of derivatives regulation over the reporting and storage of swap data. The dispute between the Depository Trust & Clearing Corporation (DTCC) and CME Group seeks a definitive answer to a fundamental question: who owns the data? In the case of the OTC derivatives market, whose notional value is about $639 trillion according to the last BIS survey, it may be up to the courts to decide the answer.
I have asked this ownership question many times over the years – to regulators, exchanges, vendors, and algorithmic code writers – and I usually get the same answer: “We like to think we own it, and have the rights to use anything that crosses our pipes.” Given the high stakes involved in obtaining control over swap data, one would think the CFTC would have anticipated this fight and had its answers ready. Instead, the commission appears to be fence-sitting, leading DTCC general counsel Larry Thompson to say at a press briefing on January 16 that the firm will “consider all options, including litigation” against the commission.
How come this basic question is being argued so late into the rulemaking process? To answer, it is important to offer a little historical perspective. The Dodd-Frank Act established the swap data repository (SDR) as a new type of entity that would collect and maintain swap transaction data and make it available to regulators. However, the Act left the development of the SDR framework in the hands of the CFTC. The commission issued its final SDR rules in September 2011 and, in October 2012, issued a “frequently asked questions” sheet on the reporting of cleared swaps.
Though Dodd-Frank is silent on the issue of which entity or entities would be considered SDRs, it was assumed throughout the industry that DTCC, which does most of the processing, sorting and other post-trade services for bilateral interest rate swaps (which comprise about 80 percent of all swaps) would be handling the data.
DTCC’s SDR was granted approval in September 2012. CME Group, who also had applied as an SDR, was not initially granted approval. So last fall, CME filed suit against the commission to force the issue. (For more information about the lawsuit, see “CME v. CFTC – A Regulator’s Conundrum” by Neal Wolkoff). The CFTC eventually approved CME’s SDR, and CME dropped its lawsuit.
Here is where the plot thickens. In conjunction with approving CME’s SDR, the commission removed three questions and answers from the FAQ sheet, specifically, language that would preclude a clearing entity from choosing the SDR to which it submits data, or from offering “bundled” clearing and data services. It is important to note that DTCC is not a CFTC-approved derivatives clearing organization, although it is a joint venture partner with NYSE in New York Portfolio Clearing (NYPC), a clearer of interest rate contracts.
In December, CME filed a request with the CFTC to publish a new rule, Rule 1001, allowing CME Clearing to “report creation and continuation data to CME’s swap data repository for purposes of complying with applicable CFTC rules governing the regulatory reporting of swaps.” In other words, anything that “crosses CME’s pipes,” becomes data to be submitted to CME’s SDR. Per CFTC rules, a 30-day public comment period commenced and closed on January 14. DTCC and others mounted a letter writing campaign, warning of CME’s alleged “anti-competitive actions” and urged the CFTC to reject the rule request.
So, while the unresolved question is the ownership of data, the real issue is that of competition. DTCC fully expected to be the industry’s “go-to” data repository, but is in its infancy as a clearing partner. CME, however, does clearing quite well in futures and energy swaps (energy swaps were among the first to make the transition to central counterparty clearing post-Enron). So although CME is in its early days of clearing interest rate swaps, after Dodd-Frank’s mandatory clearing rules come into play, much of the currently uncleared OTC derivatives will be looking for a clearing partner. Add in CME Group’s recently launched deliverable interest rate swap futures, and it is easy to see how these pieces fit together within the exchange’s vertical mix.
According to the CME proposed rule, any swap that crosses its path via clearing would be automatically reported to CME’s data repository, even if such data is also submitted to another SDR if the counterparties request it. This is perfectly acceptable, in CME’s point of view, since more transparency is always better than less and is, in fact, one of the fundamental tenets of Dodd-Frank. The fact that CME has an integrated clearing platform should not preclude its SDR from offering its services to those market participants who want to use them.
No so, says DTCC. According to their interpretation, Dodd-Frank is specific in its intent to not create vertical silos between execution, clearing and data storage. The CFTC even stated in the original FAQ sheet (before striking the language in the update) that under commission regulations, “SDRs are prohibited from tying or bundling the offering of mandated SDR services with other ‘ancillary’ services. The CME proposed rule would do exactly that, according to DTCC. And, although the topic was stricken from the FAQ, such bundling still runs counter to the intent of Dodd-Frank and CFTC regulations.
So, who is right?
One area of agreement is that the CFTC has not helped matters much. It stands accused, at best, of not anticipating this most fundamental issue of the framework it has developed over the past few years and, at worst, of playing favorites.
Ex-CFTC commissioner Michael Dunn, now CEO of DTCC’s data repository, was highly critical of his former colleagues, saying the commission “unilaterally and without notice attempted to change the policies that had been in place for 12 months,” and was allowing CME to “trump efforts [it] previously had taken so much time to promulgate.”
The CFTC has been given a monstrous task in fulfilling its Dodd-Frank mandates. But surely it could have anticipated the squabbles over data. Data services are a significant profit center for exchanges and, as a critical step in the trade cycle, would be a natural extension of any execution and clearing platform. Vertical integration is a widely accepted form of competitive advantage. It is the reason CME created its data repository, and also the reason behind DTCC’s NYPC joint venture. Trade execution, clearing and data services go together like auto sales, financing, parts and service.
As monstrous a task as rule writing has been for the CFTC, an even larger task has been handed to the market players who are expected to build and/or buy infrastructure, budget, forecast, strategize, and coordinate all aspects of running a for-profit entity. All the while, they must stay within the legal framework, much of which is still up in the air.
Is it too much to ask that we answer this most basic question, “Who owns the data?”