CFTC clamps down on "untenable" reporting rules

4 min read
mike kentz

The Dodd-Frank goal of a complete picture of swaps activity appears to be light years away. Chief regulator, the CFTC, is clamping down on industry compliance with newly established swaps reporting rules, just as market participants publicly complain to Congressional authorities that rules are too harsh.

Discord in the derivatives regulation is not new but the rhetoric surrounding troublesome Dodd-Frank reporting rules had been generally positive until recently, when the CFTC began handing down enforcement orders and warnings to those firms that failed to comply.

“The CFTC cannot carry out its vital mission of protecting market participants and ensuring market integrity without correct and complete reporting by registrants, including designated contract markets,” said Aitan Goelman, CFTC director of enforcement, in a written statement relating to the agency’s US$3m fine for the InterContinental Exchange earlier this month.

The agency followed up the following week with a warning to market participants to comply with obligations connected to the agency’s ownership and control reports (OCR) final rule. The warning left some participants confused because the rule does not come into effect until October 2015.

Earlier this week, the CFTC intensified its campaign on reporting with a fine for Marubeni America Corporation, the largest overseas subsidiary of Japan-based Marubeni Corporation. The firm was ordered to pay US$800,000 for failing to comply with reporting obligations as a dealer and merchant of agricultural commodities.

The fines are small and related to different reporting obligations, but the flurry of activity comes at a striking time. The agency created a subcommittee on data reporting compliance at the outset of Dodd-Frank implementation and has convened regular public meetings where agency staff and industry participants touted cross-the-aisle cooperation that, though challenging, would eventually produce the intended result.

But the tide of optimism appears to be turning. Aside from the agency’s frustration, a report from industry consultancy Sapient Global Markets indicates the banking industry is nowhere near full compliance even after an average dealer spend of almost US$25m each to meet those obligations.

“Despite sizable investments, many banks are still grappling with data management challenges and inefficient trade reporting processes and governance…Tight timelines have resulted in many shortcuts and reduced features, particularly related to data mapping, data ingestion and operational management information reports,” wrote Randall Orbon, senior vice president at Sapient, in a white paper released today.

“Now that several major deadlines have passed, market participants can expect active regulatory scrutiny. What regulators find will likely be fraught with issues, and the cost of non-compliance can be steep.”

Aside from the March penalties, Deutsche Bank was also fined US$3m in December by the CFTC for failing to file accurate reports and £4.7m by the Financial Conduct Authority last August for similar transgressions.

Public complaints

Adding to the intensity drawn up over the past two weeks, the blanket CFTC warning coincides with complaints from major industry participants to members of the US House of Representatives that the compliance with the rules may be impossible to achieve.

“The new OCR rules require FCMs to collect certain customer data that has never been required before and not all customers are willing to provide this new information,” said Gerald Corcoran, CEO of RJ O’Brien and chairman of the board of the Futures Industry Association, in a testimony to the House Agricultural Subcommittee on Commodity Exchanges on Wednesday.

“This presents challenges to FCMs who are required by regulation to gather data from customers who are under no regulatory obligation to provide such information. The current OCR Rule puts FCMs in an untenable position of either ceasing to do business with customers or incurring regulatory risk.”

The testimony was delivered as part of Congressional consideration of a request from the Obama Administration for CFTC reauthorisation and an increase of US$72m for the agency budget.

“In addition, privacy laws in foreign countries raise legal ramifications for reporting entities and their customers located outside the US,” he said.

The Commodity Futures Trading Commission building in Washington, DC