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59071 Christopher Giancarlo

59071 Christopher Giancarlo

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01/16/2013

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 January 14, 2013 The Honorable Gary GenslerChairmanU.S. Commodity Futures Trading Commission Three Lafayette Centre1155 21st Street, N.W. Washington, D.C. 20581Re: Chicago Mercantile Exchange, Inc.’s Amended Request to Adopt a New Chapter 10and New Rule 1001 related to the Regulatory Reporting of Swap Data (IF 12-014)Dear Chairman Gensler: The Wholesale Market Brokers’ Association, Americas (“WMBAA” or “Association”)
1
appreciatesthe opportunity to provide specific comments to the Commodity Futures Trading Commission(“CFTC” or “Commission”) related to the Chicago Mercantile Exchange Inc.’s (“CME”) amendedrequest for approval of a rule submitted pursuant to Section 40.5 of the Commission’s regulations(“Rule 1001”).
2
  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 affiliatedclearing operations, we urge the Commission to reject Rule 1001 as inconsistent with theCommission’s final reporting rules, as well as the competitive marketplace envisioned by Congress inpassing the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).
I. Rule 1001 Conflicts with the CFTC’s Final Part 45 Rules
Part 45 Rules Empower SEF or DCM to Select SDR  The WMBAA strongly objects to Rule 1001 because it directly conflicts with the CFTC’s final ruleson swap data recordkeeping and reporting requirements (“Part 45 Rules”), which empower a swap
1
The WMBAA is an independent industry body representing the largest inter-dealer brokers operating in the North American wholesale markets across a broad range of financial products. The five founding members of the group are:BGC Partners; GFI Group; ICAP; Tradition; and Tullett Prebon. The WMBAA seeks to work with Congress,regulators and key public policymakers on future regulation and oversight of OTC markets and their participants. By  working with regulators to make OTC markets more efficient, robust and transparent, the WMBAA sees a majoropportunity to assist in the monitoring and consequent reduction of systemic risk in the country’s capital markets. Formore information, please see www.wmbaa.org.
2
Letter from Tim Elliott, Executive Director and Associate General Counsel, CME, to Office of the Secretariat, CFTC(Dec. 6, 2012),
available at 
 http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/rul120612cme001.pdf [hereinafterCME Amended Request to Adopt Rule 1001].
 
 January 14, 2013 The Honorable Gary GenslerPage 2 of 6
execution facility (“SEF”) or designated contract market (“DCM”) to choose the SDR to which “onfacility” swap transactions are initially reported and all subsequent data related to such swap must bereported. Rule 1001 would violate the Part 45 Rules and allow the derivatives clearing organization(“DCO”), not the SEF or DCM, to select the SDR for swaps – including its own affiliated SDR. The CFTC’s final Part 45 Rules specify and require a SEF or a DCM, rather than a DCO, to reportswap transaction data to a registered SDR for swaps executed on a SEF or DCM.
3
Rule 45.10(a)(1)provides that, “[a]s soon as technologically practicable after execution, the [SEF] or [DCM] shalltransmit to both counterparties to the swap, and to the [DCO], if any, that will clear the swap . . . theidentity of the [SDR] to which required swap creation data is reported by the [SEF] or [DCM] . . .”
4
  The Commission made clear in the preamble to the final Part 45 Rules that it sought to require “theSEF or DCM to make the initial [primary economic terms] data report for swap [sic] executed onsuch a facility” “in order to ensure that [such data] concerning the swap is reported as soon astechnologically practicable following execution.”
5
  After an initial data report on a swap is made to an SDR, Rule 45.10(a)(2) specifies that “all requiredswap creation data and all required swap continuation data reported for the swap reported by any registered entity or counterparty shall be reported to that same [SDR].”
6
In other words, as theCommission noted in the preamble to the final rule, “in practice this [means] that the SEF or DCM would select the SDR for platform-executed swaps . . .”
7
In contrast, Rule 1001 would allow CMEto require all swaps cleared on its platform to be reported to its own SDR, in direct contravention of the CFTC’s clearly articulated approach.Clearing Does Not Constitute Termination of SwapIn its amended request for approval of Rule 1001, CME claims that, “[o]nce the original swap isaccepted for clearing, it will be extinguished and replaced by two resulting swaps” under theproposed Rule 1001 reporting framework: (1) “one resulting swap [would] be between CMEClearing and Party A[;]” whereas (2) “the other resulting swap [would] be between CME Clearing and Party B.”
8
CME describes how “CME Clearing would send an electronic message to the SDR that received the Part 43 swap transaction and pricing data or the Part 45 creation data report for theoriginal swap . . . that the original swap has been accepted for clearing and extinguished.”
9
 
 This interpretation is inconsistent with the plain language of the CFTC’s rules and market practice. The Part 45 Rules require the continued reporting of life cycle data, which includes novation
3
 
See 
Swap Data Recordkeeping and Reporting Requirements, 77 Fed. Reg. 2,136, 2,208 (Jan. 13, 2012).
4
 
Id.
(emphasis added). The final Part 45 rules require the reporting counterparty ( 
e.g.
a swap dealer or major swapparticipant) to make the initial report for an off-facility swap.
5
 
Id.
at 2,143.
6
 
Id.
at 2,208 (emphasis added).
7
 
Id.
at 2,143 (emphasis added).
8
CME Amended Request to Adopt Rule 1001, at 2.
9
 
Id.
 
 January 14, 2013 The Honorable Gary GenslerPage 3 of 6
through clearing,
10
to the same SDR throughout the life of a swap.
11
The Commission’s rules areclear in that they expect reporting to an SDR to establish a complete audit trail of a swap fromcreation, through life cycle events, and ending with termination of the swap. The same is true withregard to addressing USI code creation with trades given codes at execution and then undergoing compression or full novation. Even in that instance, the Commission expresses a desire forcontinuity in SDR, noting that “where a new swap takes the place of an old swap, such as where acompression or full novation has occurred . . . a new USI will be assigned to the new swap, and theSDR to which the swap has been reported will be required to map the new USI back to the USIs of the swaps from which the new swap originated, in a manner sufficient to allow the Commission andother regulators to follow the entire history and audit trail of each affected swap.”
12
CME’sproposed approach would violate the Part 45 Rules, fragment swap transaction data, and frustratethe Commission’s efforts to record the entirety of one swap in a single location.Further, CME’s assertion that clearing creates a “new” swap that can be reported to a new SDR  would make compliance with Rule 45.10 impossible, ending the mandatory practice of reporting swaps data to one SDR. In addition to the inconsistency with existing Commission regulations, thisapproach would preclude the achievement of recognized public policy benefits from single-SDR reporting.
13
 CME’s Claim of Inefficiencies of Reporting to Multiple SDRs is Without MeritFor similar reasons, the CME’s concern regarding the obligation of DCOs to report to multipleSDRs is without merit. CME incorrectly asserts that, “[i]f the DCO reports the cleared swap dataPart 45 requires to an SDR, any further reporting by Party A or Party B would be duplicative andpotentially confusing.”
14
The mere fact that a DCO may have to provide swap transaction data tomultiple registered SDRs is not, on its own, a significant burden that outweighs the regulatory andpublic benefits of consolidated swap data reporting.
15
At the moment, there are only threeprovisionally registered SDRs. CME cannot reasonably claim that the obligation to report swapstransactions to two other SDRs (the third is its own captive SDR) is an onerous burden. As
10
Section 45.1 (“
Life cycle event 
means any event that would result in either a change to a primary economic term of aswap or to any primary economic terms data previously reported to a swap data repository in connection with a swap.Examples of such events include, without limitation, a counterparty change resulting from an assignment or novation; apartial or full termination of the swap; a change to the end date for the swap; a change in the cash flows or ratesoriginally reported; availability of a legal entity identifier for a swap counterparty previously identified by name or by some other identifier; or a corporate action affecting a security or securities on which the swap is based ( 
e.g.
, a merger,dividend, stock split, or bankruptcy).”).
11
Section 45.4.
12
Swap Data Recordkeeping and Reporting Requirements, 77 Fed. Reg. at 2,159.
13
“Roundtable participants generally endorsed the NOPR provision requiring that all swap data for a given swap mustbe reported to a single SDR, and no comment letters suggested changing this requirement . . . The Commission believesthat important regulatory purposes of the Dodd-Frank Act would be frustrated, and that regulators’ ability to seenecessary information concerning swaps could be impeded, if data concerning a given swap was spread over multipleSDRs.”
Id.
at 2,168.
14
CME Amended Request to Adopt Rule 1001, at n.5.
15
 
See 
Swap Data Recordkeeping and Reporting Requirements, 77 Fed. Reg. at 2,159.

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