CFTC rule change for improving swap data reporting

In September 2020, the Commodity Futures Trading Commission (CFTC) approved revisions to its rules governing swap data reporting under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Specifically, the CFTC modified the requirements related to Real-Time Public Reporting (Part 43), Swap Data Recordkeeping and Reporting (Part 45), and Swap Data Repositories Registration (Part 49).

Through these revisions, the CFTC aims to harmonize Dodd-Frank swap data reporting with international reporting standards. While this lessens some reporting burdens for non-swap dealer/major swap participant parties, it also creates new obligations and processes. For example, the updated reporting specifications now include:

• 255 possible data fields at the Swap Data Repository (DTCC) to be applied per transaction submission based on the product and lifecycle event, including the significant addition of 108 new fields
• Mandated data reconciliation procedures for reporting counterparties to validate 186 applicable data fields for all active positions

Chatham’s Regulatory Advisory and Technology teams have been preparing for these changes in various ways, including extensive technology re-architecture, client advocacy, authoring comment letters, and participation in the DTCC’s North American Product Working Group. We will complete the work required for your institution to comply with the CFTC’s rules, which takes effect on December 5, 2022 (Compliance Date). As highlighted below, there will be additional data requirements and changes to the way your institution approaches its swap data reporting obligations. Importantly, the modifications apply to both new transactions after the Compliance Date, as well as any open/active transactions. Chatham will help you update your book of legacy transactions, as needed, prior to the Compliance Date.

While Chatham is the third-party data submitter for your Dodd-Frank swap data reporting, the CFTC specifies in its rules that the ultimate compliance obligation remains with your institution as the reporting counterparty.

Key Compliance Changes

Legal Entity Identifier (LEI)

The CFTC will now require all reporting parties to ensure their counterparty has a LEI. Only individuals acting in a private capacity and not through the course of a registered business activity (Natural Persons) are exempt from this requirement. Annual LEI renewals are not required for End Users unless new swap transactions are anticipated.

When your borrower is a Natural Person, in ChathamDirect, set the Borrower Type to Natural Person. Doing so will remove the LEI field. For Natural Persons, an alternate identifier will be generated by Chatham in accordance with the CFTC’s requirements.

We will not be implementing controls in ChathamDirect to ensure that a LEI has been included. A warning will appear in ChathamDirect when you specify that your borrower is a Legal Entity but do not provide the LEI. Chatham will be unable to report the trade until this information has been received. As required by the CFTC, DTCC will reject any submissions where a valid LEI or NPID is not provided. LEIs and NPIDs will be required for legacy trades and new trades as of the Compliance Date. Therefore, if you have legacy trades that need remediation, you may require your borrower to purchase a LEI or you may do so on their behalf prior to the Compliance Date.

Federal Entity Indicator

The CFTC has included a new field, Federal Entity Indicator, in its technical specifications. A Federal Entity is an entity established pursuant to federal law including: (i) an agency of federal authority or executive department; (ii) a corporation owned or controlled by the government of the United States; (iii) a government-sponsored enterprise that has a federal charter; (iv) a federally funded research or development center; or (v) an entity established by or with an ultimate parent of one of the entity types described in (i)-(iv). Federally chartered financial institutions are excluded from this definition.

If your counterparty is a Federal Entity, you must make this selection in ChathamDirect. When you have specified that your Borrower Type is Legal Entity, you will be able to set the Legal Entity Type to specify if your borrower qualifies as a Federal Entity. The default value will be set to Non-Federal Entity.

You will not need to specify whether or not your Natural Person borrower is a Federal Entity. When you have specified your borrower is a Natural Person, Chatham will, by default, report that your counterparty is not a Federal Entity.

Swap Data Repository Validation

One of the major changes to the reporting rules is that reporting counterparties must now verify the accuracy of all open and active swaps on a periodic basis. For non-swap dealers, this is done once a quarter and involves the reconciliation of 186 data fields, per transaction, as included within the DTCC’s Trade State report, not just the economic terms. Incorrect or missing information must be corrected as soon as technologically possible and no later than seven days after discovery. This requirement applies to any swap, whether active or terminated, that is still within the record retention period.

This is a significant undertaking for all market participants. Leveraging our existing control processes and following the development of best practice in market working groups, Chatham is actively designing a solution to meet the needs of community and regional banks. We will provide additional details in the coming months. The first quarterly reconciliation will take place in March 2023.

Supporting information

If you are interested in more details regarding how we handle reporting on your behalf to DTCC and related control details, the following documentation is available on request:

• Customer swap program regulatory reporting requirements guide
• SSAE18 SOC1, Type II report — Representing the design and effectiveness of Chatham’s control environment built on an integrated process and technology capabilities, with specific attention to:
  • Control objectives 6 and 7, economic data integrity controls
  • Control objective 10, mark-to-market valuation controls

What can your institution do now?

• As needed, Chatham will remediate your active transactions where the borrower LEI is missing. If your borrower needs to register for a LEI, your Chatham client relationship manager will work with you to complete this process.
• Prior to the end of the year, Chatham will ask you to make an attestation as to the Federal Entity status of your existing borrowers.
• Update your internal policies to reflect the new requirements and set an effective date for implementation.
• Stay engaged with future communications from Chatham regarding the rule changes and their impact on your institution.

Contact your Chatham client relationship manager if you have questions or would find additional information helpful.