Regulatory Initiatives Under Dodd-Frank Act Concerning Universal Standard To Identify Parties To Financial Contracts; 12/16 Conference Call
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December 9, 2010
TO: BANK, TRUST AND RECORDKEEPER ADVISORY COMMITTEE No. 53-10BROKER/DEALER ADVISORY COMMITTEE No. 61-10
CLOSED-END INVESTMENT COMPANY COMMITTEE No. 28-10
ETF ADVISORY COMMITTEE No. 53-10
EQUITY MARKETS ADVISORY COMMITTEE No. 51-10
FIXED-INCOME ADVISORY COMMITTEE No. 34-10
OPERATIONS COMMITTEE No. 40-10
SEC RULES COMMITTEE No. 63-10
SMALL FUNDS COMMITTEE No. 28-10
TRANSFER AGENT ADVISORY COMMITTEE No. 83-10 RE: REGULATORY INITIATIVES UNDER DODD-FRANK ACT CONCERNING UNIVERSAL STANDARD TO IDENTIFY PARTIES TO FINANCIAL CONTRACTS; 12/16 CONFERENCE CALL
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“DFA”) established within the Treasury Department a new Office of Financial Research (“OFR”). OFR is authorized to collect data to support the Financial Stability Oversight Council (“FSOC”) and to set standards for the reporting of such data to OFR. OFR has issued a statement of policy regarding its preference to adopt a universal standard for identifying parties to financial contracts that is developed and implemented by the financial industry and other relevant stakeholders. [1]
In coordination with OFR, the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) have issued releases proposing the development of similar universal standards. [2] The proposed standards would be used by swap data repositories to assign unique identifiers to swaps [3] and certain market participants for reporting purposes. Each of the Releases is briefly summarized below.
Comments on OFR’s statement of policy are due by January 31, 2011. Comments on the SEC’s proposal are due by January 18, 2011. Comments on the CFTC proposal are due by February 7, 2011. We will hold a conference call at 3:00 p.m. Eastern time on Thursday, December 16th to discuss the releases and possible ICI comments. If you would like to participate on the call, please email Gwen Kelly at gwen.kelly@ici.org to obtain the dial-in information. If you are unable to participate on the call but have views to offer, please contact Marty Burns at mburns@ici.org, Frances Stadler at frances@ici.org, or Heather Traeger at htraeger@ici.org prior to the call.
OFR Release
The OFR Release provides background information on OFR’s authority and responsibilities under the DFA. In addition to its authority to collect data to support FSOC, OFR is authorized to provide such data to FSOC and its member agencies and to standardize data types and formats. The DFA requires OFR to prepare and publish a financial company reference database, a financial instrument reference database, and formats and standards for data reported to FSOC. Such data must include information that identifies counterparties.
The OFR Release explains the need for a universal standard for identifying parties to financial contracts (referred to as a “Legal Entity Identifier” or “LEI”). It discusses the importance of precise and accurate identification of legal entities engaged in financial transactions to the private and public sectors, as well as the problems posed by the lack of a universal identification standard. It notes that identification of legal entities is a “fundamental ingredient” in the creation of a reference database of financial companies. The OFR Release also mentions that the CFTC and SEC are working to develop standards for reporting swaps and security-based swaps, respectively, to data repositories, as required by the DFA. It indicates that these standards will include requirements for data repositories to have unique and consistent identifiers for counterparties and reference entities, and that OFR is coordinating with the CFTC and SEC in their efforts.
OFR’s proposed statement of policy expresses OFR’s intent, in consultation with the Chairperson of FSOC, to establish requirements for reporting data on financial contracts to OFR that include a standardized way of identifying counterparties. OFR would prefer to adopt a universal standard developed and implemented by the financial industry and other relevant stakeholders. OFR believes that participation of international standard setting bodies would be beneficial.
The statement of policy indicates that if an LEI is established to OFR’s satisfaction by July 15, 2011, OFR, in consultation with the Chairperson of FSOC, plans to mandate use of that standard for data reported to OFR. The statement of policy describes the considerations that will inform OFR’s determination, including: (1) the characteristics of the LEI, including the process of developing and maintaining standards for the LEI; (2) the institutional arrangements for issuing LEIs to specific legal entities; and (3) the institutional arrangements for developing, maintaining, and publishing related reference data.
SEC Release
Pursuant to Sections 763 and 766 of the DFA, the SEC has proposed rules requiring reporting to and public dissemination by a swap data repository of swap transaction, volume, and pricing information. According to the SEC Release, not all of the reported data would be subject to public dissemination. All of the data would, however, be accessible by regulators to facilitate regulatory oversight and monitoring of the swap market by providing comprehensive information regarding swap transactions and trading activity.
Among other data, the proposed SEC rules would require that a “unique identification code” or “UIC” be assigned to each product or person involved in a swap transaction. The SEC Release explains that a UIC would have to be assigned by or on behalf of an internationally recognized standards-setting body (“IRSB”), noting the benefit to regulators worldwide of easily identifying each market participant using a single reference code. Specifically, a UIC would have to be assigned by or on behalf of an IRSB that imposes fees and usage restrictions that are fair and reasonable and not unreasonably discriminatory. [4] A UIC would be assigned to each participant, broker, desk, and trader involved in the swap transaction.
CFTC Release
Pursuant to Sections 728 and 729 of the DFA, the CFTC has issued proposed swap data recordkeeping and reporting rules for swap market entities and participants. Similar to the SEC’s proposal, the CFTC’s rules would require the assignment of unique identifiers to certain pieces of information in a swap transaction, including the swap, the counterparties, and the underlying products referenced in a swap. The CFTC Release explains that “universal, accurate, and trusted methods of identifying” these three categories of information are “crucial tools” for regulators who are responsible for “measuring and monitoring systemic risk, preventing fraud and market manipulation, conducting market and trade practice surveillance, enforcing position limits, and exercising resolution authority.”
To help with these tasks, the proposed CFTC rules would require the assignment of a “unique counterparty identifier or “UCI” to each counterparty to a swap. [5] (The CFTC Release notes that a UCI is the same as an LEI.) The CFTC Release explains that, ideally, the UCI would be determined by an international “voluntary consensus standards board” as defined by Office of Management and Budget Circular No. A-19 Revised. The CFTC would prescribe its own method for creation of a UCI, however, if the CFTC were unable to identify an acceptable system prior to the implementation of the proposed rules. The CFTC Release identifies a list of principles that should govern the UCI identification system, including that the system should:
- Result in a unique identifier format that is capable of becoming the single international standard for unique identification of legal entities in the financial sector on a global basis.
- Be available to all interested parties on a non-discriminatory, royalty-free or reasonable royalty basis.
- Be supported by a trusted and auditable method of verifying the identify of each legal entity receiving a UCI, both initially and at appropriate intervals thereafter.
- Maintain robust quality assurance practices and system safeguards acceptable to the CFTC.
- Be sufficiently extensible to cover all existing and potential future legal entities of all types that are or may become swap counterparties, are or may become involved in any aspect of the financial issuance and transactions process, or may be subject to required due diligence by financial sector entities.
- Assign only one unique identifier to any legal entity.
- Have a unique identifier format consisting of a single data field, and contain either no embedded intelligence or as little embedded intelligence as practicable.
- Persist despite all corporate events.
Frances M. Stadler
Deputy Senior Counsel
endnotes
[1] See Office of Financial Research; Statement on Legal Entity Identification for Financial Contracts, 75 Fed. Reg. 74146 (Nov. 30, 2010), available at http://edocket.access.gpo.gov/2010/pdf/2010-30018.pdf (“OFR Release”). See also Frequently Asked Questions about the OFR, available at http://www.treasury.gov/initiatives/Pages/ofr.aspx.
[2] See Securities and Exchange Commission; Regulation SBSR - Reporting and Dissemination of Security-Based Swap Information, 75 Fed. Reg. 75208 (December 2, 2010), available at http://www.sec.gov/rules/proposed/2010/34-63346fr.pdf (“SEC Release”) and Commodity Futures Trading Commission; Swap Data Recordkeeping and Reporting Requirements, 75 Fed. Reg. 76574 (December 8, 2010), available at http://www.cftc.gov/ucm/groups/public/@otherif/documents/ifdocs/federalregister112210.pdf (“CFTC Release”).
[3] In this memorandum, the term “swap” will be used to mean “security-based swap” when used in the context of SEC-regulated security-based swaps and “swap” when used in the context of CFTC-regulated swaps.
[4] If no qualifying IRSB existed, the proposed SEC rules would require the swap data repository to develop its own method to assign UICs.
[5] Information regarding a counterparty’s affiliations also would need to be reported into a non-public database accessible to regulators. The CFTC Release seeks comment on whether the proposed database should be maintained by the CFTC, OFR, an international “voluntary consensus standards body” (see below), a self-regulatory organization, or some other organization.