CME Group Proposed Rule: Regulatory Reporting of Swap Data - Comment Letters

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Gavel.png RULE APPROVED: On March 6, 2013, the CFTC approved CME Group Rule 1001
Timeline: CME Group Proposed Rule Change on Swap Data Reporting
Proposal Date Comment Deadline Rule Approved
December 10, 2012 January 14, 2013 March 6, 2013

On November 9, 2012, CME Group submitted to the CFTC a proposed rule change would allow its clearing division to report swap data to its own SDR "for the purposes of complying with applicable CFTC rules" on swap reporting. The company amended its request in a letter dated December 6, 2012. The rule request was met with resistance from the Depository Trust and Clearing Corporation (DTCC), who expresses concern about conflicts of interest regarding the proposal. The CFTC opened a public comment period regarding the rule on December 10, 2012. The period closed on January 14, 2013. A selection of the letters can be found below.

Note: DTCC has issued several letters regarding CME Proposed Rule 1001. The first four letters, from November to early December 2012, were more general. Subsequent letters include one that included an anti-trust and cost-benefit analysis by NERA Economic Research, and one from former CFTC commissioner Michael Dunn, who is currently chairman of DTCC Data Repository.

Depository Trust & Clearing Corporation - Nov-Dec 2012

Regulatory Reporting of Swap Data
November 9, 2012 November 20, 2012 December 4, 2012 December 7, 2012

On November 9, 2012, CME Group filed a request to the CFTC to approve a change to the CME's Rulebook that would allow for all swaps cleared by the CME Clearing, and resulting positions, creation and continuation data shall be reported to CME's swap data repository for purposes of complying with applicable CFTC rules governing the regulatory reporting of swaps.

The request prompted a response from DTCC, in the form of three comment letters, dates November 20, December 4 and December 7, 2012. The letters challenge the CME request, citing various reasons including:

  • As a systemically important financial market utility FMU, an expedited decision is inappropriate.
  • The rule would effectively reverse CFTC rules governing DCO core principles, namely public disclosure and fair and open access.
  • The proposed rule change is inconsistent with the language and intent established by the Dodd-Frank Act and will have a negative impact on many market participants who have relied on the Part 49 and Part 45 rules, spending an entire year planning and investing hundreds of millions of dollars to comply with the CFTC’s requirements.
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Depository Trust & Clearing Corporation - January 8, 2013

Comments in Response to The Chicago Mercantile Exchange Inc.’s Amended Submission #12-391R
January 8, 2013

From the comment letter:

"During the Dodd-Frank Act legislative process, Congress considered: (1) whether all trades, both cleared and uncleared, should be reported to SDRs; and (2) whether there should be a single SDR for each asset class (e.g., credit, interest rate, etc.) to promote the consolidation of market data. Ultimately, Congress mandated that all trades – both cleared and uncleared – be reported to SDRs. In considering whether there should be a single SDR for each asset class, Congress determined that the decision should be made by market forces, rather than dictated by statute or regulation. DTCC accepted Congress’s mandate and has since been working within the confines of the statute, allowing competitive market forces to shape the reporting of swap transaction data."

"In contrast, CME has pursued a campaign to undermine competition in the swap markets, with the attendant reductions in market safety and soundness. CME’s advancement of Rule 1001 is the latest link in a chain of events initiated by CME to cause the Commission to unilaterally change rules and policies that had been relied on by market participants since they were finalized in early 2011. Until November 2012, the Commission resisted CME’s entreaties, but now there is good reason to be fearful that the Commission’s commitment to transparency for swap trades and a level competitive playing field – an objective prescribed by Congress – has evaporated."

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CME Group - January 16, 2013

Comments in Response to The Chicago Mercantile Exchange Inc.’s Amended Submission #12-391R
January 16, 2013

From the comment letter:

"Nothing in the CEA or CFTC regulations is inconsistent with Rule 1001 because Rule 1001 merely identifies how a derivatives clearing organization ("DCO") that accepts swaps for clearing will discharge its, and only its, obligation under Part 45 to report the cleared swap data the DCO already maintains in its capacity as a DCO to a selected swap data repository ("SDR"). DTCC strains to find something in the CEA and CFTC regulations that is inconsistent with Rule 1001, but without distorting the meaning and import of Rule 1001, or the applicable law, it fails. Astonishingly, DTCC does not stop there; it further claims that CME would violate the antitrust laws by reporting cleared swap data it maintains in its DCO to its SDR as provided in Rule 1001. DTCC's complaints have no merit."

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International Energy Credit Association - January 14, 2013

Comments to Amended Request of Chicago Mercantile Exchange to Adopt New Chapter 10 and New Rule 1001 of CME’s Rulebook (IF 12-014)
January 14, 2013

From the comment letter:

"With respect to CME’s proposed Rule 1001 that would require participants using CME’s clearing services to allow data for trades cleared through CME’s DCO to be reported to CME’s own SDR under Part 45 of the Commission’s Regulations, the IECA questions why the Commission chose to require reporting to an SDR of cleared swaps when (i) the Commission will already have access to information about cleared swaps from the DCOs and (ii) reporting of cleared swaps to an SDR is not required by the Dodd-Frank Act.

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Global Financial Markets Association - January 7, 2013

Chicago Mercantile Exchange Inc. ("CME") Submission # 12-391
January 7, 2013

From the comment letter:

"Our members believe that the Commission should not approve the Proposed Rule for multiple reasons.The intention of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”)was to promote accountability and transparency in the derivatives market, including requiring designated clearing organizations ("DCO") such as the CME to "permit fair and open access"3. The Proposed Rule, which would require all swaps cleared with the CME to be reported to the CME's SDR, violates this principle on its face. Furthermore, the Commission has clearly indicated that "consistent with the principles of open access... a registered swap data repository shall not tie or bundle the offering of mandated regulatory services with other ancillary services that a swap data repository may provide to market participants." The Proposed Rule would tie the use of the CME's clearing function to a customer's use of the CME's SDR in violation of this rule. We emphasize that the concerns raised in this letter are not exclusive to the CME and the Proposed Rule but apply generally to any DCO that seeks to require all swaps cleared with it to be reported to a specific SDR."

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Commodity Markets Council - January 7, 2013

Chicago Mercantile Exchange, Inc.’s Amended Request to Adopt a New Chapter 10 and New Rule 1001 related to the Regulatory Reporting of Swap Data
January 7, 2013

From the comment letter:

"CMC urges the CFTC to approve CME’s proposed rule amendment because it would facilitate efficient and cost effective reporting of cleared swaps. CMC further urges the CFTC to amend Part 45 of the CFTC regulations to remove any uncertainty regarding the ability of DCOs to report to the SDR of their choice. These measures will enable CMC members and other swaps market participants to have an efficient and cost effective alternative for meeting the SDR requirement when clearing swaps through a DCO."

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ISDA - January 7, 2013

Chicago Mercantile Exchange Inc. Amended Request to Adopt New Chapter 10 andNew Rule 1001 (IF 12-014)
January 7, 2013

From the comment letter:

"ISDA believes that the Proposed Rule is anticompetitive and would impose added costs and connectivity requirements on market participants, thus distorting choices, frustrating assumptions and wasting investment already committed in the earlier construction of reporting systems. CME’s proposal does not adequately consider the Proposed Rule’s interaction with other Commission reporting rules and would create compliance uncertainties that the Commission would need to address. Furthermore, the reporting model contemplated by the Proposed Rule will lead to a more fragmented reporting structure, resulting in aggregation and reconciliation challenges for both market participants and the Commission. For the foregoing reasons, ISDA does not support approval of the Proposed Rule."

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NERA Economic Consulting - January 14, 2013

Chicago Mercantile Exchange Inc. Amended Request to Adopt New Chapter 10 and New Rule 1001 (IF 12-014)
January 14, 2013

The comment letter, which was submitted by DTCC on January 14, 2013, is centered on a study by NERA Economic Consulting on antitrust and cost-benefit issues related to CME Proposed Rule 1001. Among the study's findings:

  • Rule 1001 raises potentially serious antitrust questions, namely the anti-competitive effects of tying clearing and SDR services.
  • While certain cost savings have been posited by CME, it is not clear how much of any such DCO cost savings or efficiencies would be passed along to SDR service customers or SDR data purchasers.
  • When considering the benefits of any such cost savings, the Commission must also consider the additional costs, risks, and benefits to other stakeholders of Rule 1001. Many different cost, risk, and benefit issues arise when contemplating the implementation of Rule 1001 relative to the status quo market rules.
  • Several different types of stakeholders in the provision and use of SDR services and/or SDR data sales, including regulatory agencies, swap market participants, and non-counterparty SDR data purchasers and data vendors, could incur incremental costs and face heightened risk as a result of the imposition of Rule 1001.

The letter and affiliated study highlight several concerns and which parties may be affected.

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DTCC Data Repository - January 14, 2013

Chicago Mercantile Exchange Inc. Amended Request to Adopt New Chapter 10 and New Rule 1001 (IF 12-014)
January 14, 2013

From the comment letter:

Should the Commission allow the adoption of the proposed rule:

  1. it will erase significant efforts to develop and implement the Dodd-Frank trade reporting regime;
  2. it will run contrary to the fair and open access principles of the Commodity Exchange Act (“CEA”),
  3. DTCC Deriv/SERV LLC, the Company and firms will lose the investment of considerable time and resources spent in preparation for compliance with the existing reporting framework; and
  4. the financial markets will be susceptible to diluted systemic risk management capabilities, threatening the overall safety and soundness of the financial system."
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WMBAA - January 14, 2013

Chicago Mercantile Exchange Inc. Amended Request to Adopt New Chapter 10 and New Rule 1001 (IF 12-014)
January 14, 2013

From the comment letter:

The WMBAA is concerned that Rule 1001 will begin a slow progression toward permitted bundling of mandated regulatory services—trade execution, clearing, and swap data repository (“SDR”)reporting. As trade execution platforms in over-the-counter (“OTC”) markets without affiliated clearing operations, we urge the Commission to reject Rule 1001 as inconsistent with the Commission’s final reporting rules, as well as the competitive marketplace envisioned by Congress in passing the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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