CFTC Rewrite: Understanding the challenges posed by the US’s data quality journey

Efforts to improve the quality of reported derivatives data have been years long and monumental, not only in the United States, but globally. While the Commodities Futures Trading Commission (CFTC) was the first regulator to require firms to report derivatives trade data, the CFTC Rewrite, published in November 2020, builds on that foundation by updating the rules in combination with international standardization and harmonization efforts to ensure that the data reported has a meaningful application.

Bloomberg’s white paper, CFTC Rewrite: The Data Quality Journey in North America, highlights two key developments set to have a significant impact on data quality:

• Update to the data attributes in appendices of Parts 43 and 45
• Clarity and guidance on the verification process and how often firms must ensure the accuracy and completeness of their reported data

While firms may have crossed the initial hurdle of getting their reporting regimes up and running, the CFTC Rewrite represents the largest regulatory reporting change since CFTC reporting requirements began in 2012, and much work needs to be done to meet the May 2022 implementation deadline. The industry has requested the May date be postponed because of the delay to the finalization of the technical specification. However, as of December 2021, no delay or action has been granted and firms need to prepare accordingly.

While the new requirements are a significant lift, there are vendor solutions that help customers who are looking for support with their regulatory mandate to the CFTC. These include Bloomberg’s Assurance solutions, which enable clients to verify the quality of their reporting in line with all the new specifications from the CFTC with a comprehensive and independent control framework for firms.

Technical specifications

The journey to improve the quality of reported derivatives data hasn’t always been smooth. In the US, the initial set of data elements specified in the Exhibits to Parts 43 and 45 were not prescriptive enough, which led the industry to make assumptions on what data was required. As a result, divergent interpretations compromised data quality.

With the aim of reducing ambiguity and operational complexity, and incorporating international harmonization efforts, the CFTC Rewrite introduces updates to four key areas:

• Data attribute names and definitions
• Specific data validation requirements per message type & asset class
• Dissemination rules
• Valid values & allowable formats

Overall, the extra level of detail described in the CFTC technical specifications means firms will have to maintain far more complex reporting systems and controls. The white paper highlights both new or updated fields that pose particular challenges to firms working towards the May 2022 deadline: Unique Transaction Identifier (UTI), Counterparty Federal Entity Identifier, Action/Type/Event Type, Amendment Indicators, Unique Product Identifier (UPI), and Collateral Fields. The partial adoption of common data elements (CDE) may also create additional operational challenges, since it opens the door for other regulators to have their own interpretations of CDE, which may not be interoperable.

Meeting the new specifications in a short period of time may involve additional development and testing cycles, potentially resulting in increased costs across the industry. For a complete understanding of the changes to the technical specifications of the CFTC, read Bloomberg’s comprehensive white paper.

Verification process

The CFTC Rewrite provides more guidance on the expectations of swap data repositories (SDR) and reporting counterparties ((Swap Dealers, Swap Execution Facilities, Designated Contract Markets, and third-party reporters) in the new Parts 45 and 49 rules. These changes address lingering issues with the verification process, and cover a diverse range of areas, from the requirements of SDRs, to reporting timelines, error corrections, and verification logs.

Firms have varying approaches to ensure completeness and accuracy of their reported data. The most sophisticated clients have these checks already in place, while others still implement basic reconciliation checks, rudimentary accuracy checks, or they believe acceptance to an SDR indicates completeness and accuracy.

While some firms still rely on internal solutions, most utilize third-party vendors, like Bloomberg, to ensure completeness and accuracy of reported data. The value in using a third-party for this process lies in having independent control on internal eligibility determination and accuracy of reported data. Firms that have not built internal infrastructures to support the verification process face an in-house build or an integration with a third-party that provides this service. Firms who have implemented more consultative solutions that can take weeks or months to produce assessments will need to revisit those approaches to produce more timely and automated output.

How we can help

Over the last few years, the industry has been looking at how firms can reduce operational complexity and leverage emerging technologies to automate the process of trade and transaction reporting. Bloomberg’s Assurance solutions provide a comprehensive control framework for firms regardless of the reporting solution they use. Developed to help firms meet regulatory expectations for proactive control, Bloomberg’s Assurance solution is designed to provide clients with the transparency and regulatory intelligence they need to ensure confidence in their reporting quality and reduce the risk of regulatory sanctions. It also provides global coverage of key regimes including: CFTC (DFA), Canada, MiFIR, EMIR, SFTR, HKMA, MAS, ASIC, JFSA & BOI. Please request a demo if you would like to discuss the issues outlined in the white paper or to see how Bloomberg’s Assurance solution can help.

Looking for a reporting solution? Bloomberg also offers CFTC & Canada reporting through RHUB. Request a demo today.