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Statement on Swap Data Repositories (SDR) and Reporting and Dissemination of Security-Based Swap Information (SBSR)

Commissioner Kara M. Stein

Jan. 14, 2015

The rules we are voting on today are about transparency. During the financial crisis, regulators and market participants confronted monumental questions regarding whether the largest financial firms in the country would survive or fail, and how those failures would affect the entire economy. Amazingly, when faced with these decisions, regulators and market participants both had extremely limited information about the financial landscape in front of them.[1]

What they did know scared them: that our largest banks and financial firms had taken on massive positions in exotic securitized products, many of which had gone bad; that their ability to absorb those losses in equity capital was razor thin; and that they were caught in a web of interconnectedness where trillions of dollars — yes, trillion with a “T” — in gross notional swap liabilities left them vulnerable to a cascading series of defaults and collapses.

Ironically, the very market that was supposed to insure against or “hedge” risks had in fact concentrated them dangerously in a small handful of firms. And no one in the government or in the marketplace knew exactly how a web of financial contracts known as “swaps” connected the fate of one firm to another, because the world of swaps was cloaked in secrecy. [2]

Not surprisingly in retrospect, neither regulators nor markets responded well to this lack of transparency. Quite simply, what we went through in 2008 was a disaster for everyone involved, not least of all the hard-working American families who never got a bailout and continue to struggle.

After the financial crisis, there was world-wide acceptance of the need to reform the global swaps market to increase transparency and oversight, reduce interconnectivity and instability, and protect against abusive practices. The leaders of twenty of the world’s largest economies quickly agreed that standardized swaps needed to be traded on exchanges or on electronic trading platforms. They also agreed that all standardized swaps needed to be centrally cleared, and those that were not cleared, subjected to higher capital requirements. And, they agreed that all swaps must be reported to trade repositories.[3]

Soon thereafter, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) set out a landmark framework towards achieving those goals. Today, the Commission is taking several long-delayed steps toward providing for the Congressionally-mandated trade reporting regime for security-based swaps, such as credit default swaps.

Let me be clear: the rules today are but the start, not the end, of the work we have to do. As the rules themselves indicate, there are a number of critical pieces of the framework that need to be completed. We still must set technical specifications (often called taxonomies) for reporting swaps data to the Commission, determine what constitutes a large “block trade,” and replace the twenty-four hour interim reporting period with the statutorily mandated requirement for real-time reporting, among other items. Of course, the Commission also needs to complete a number of other separate rules, like the registration of security-based swap dealers and major swap participants, too.

In short, we have a lot of work to do. That’s why I’m pleased that the Chair has prioritized moving this rule and the related component pieces forward. I’m eager to help do what I can to get the SEC’s part of the swaps regime up and running quickly and effectively.

So what are we accomplishing today? I think we’re accomplishing a fair amount.

First, I am pleased that the Commission’s rules today on swap data repositories — the private hubs that will collect and store the swaps information — emphasize the importance of both governance and computer systems’ resiliency. This will help protect investors and market participants, and help ensure accuracy and confidentiality where necessary.

Second, I’m pleased that the Commission is recognizing that obtaining high quality data requires attention to detail at every step of the process. Requiring from the outset that data formats and computer language be standardized, and designed to maximize accuracy and completeness, has been a top priority of mine. These technical standards may seem kind of “boring” but they are important. Not only do the users of the swaps data — market participants, regulators and the public — need clear standards to make the information usable, but providing these technical standards up front helps market participants build their IT systems with some assurance that their system will be able to obtain and provide the necessary data.

Although we’re not adopting technical specifications today, we are clearly indicating in Regulation SBSR that we will be providing them. I want to thank the Chair for directing the staff to speed the development of those technical standards and formats. I hope we can produce a proposal within the next three months because getting these standards done soon is critical for successful implementation of this rule.

Third, I am also pleased that the Commission’s rules mandate the use of the Global Legal Entity Identifier or LEI. One of the lessons of the financial crisis was that there was no simple way to map the interconnectedness of financial entities, especially complex global financial firms with thousands of affiliates. The LEI framework represents a successful collaboration between the Office of Financial Research, the private sector, and regulators from around the world.

This LEI “tag” is a market-based approach that uniquely identifies each legal entity that engages in a financial transaction and links that legal entity to its corporate parent. This is critical to helping ensure that regulators will never again be staring into the abyss of a financial crisis without even the most basic of information about swaps exposures when they need to make challenging and difficult policy choices. In addition to LEI, product and transaction identifiers are also important, and we will need to monitor their development and standardization.

Fourth, we must pay close attention to how complex, bespoke swaps are handled. While our reporting rule doesn’t break bespoke or customized swaps down into their component pieces for pricing or other purposes, it does mandate the reporting and dissemination of such complex swaps’ primary terms, which include, among other things, all of the reference assets underlying the complex swap. Additional levels of detail must also be provided to regulators.[4]

This is a first step towards greater transparency regarding complex, bespoke swaps, and I hope the approach will provide market participants and regulators broader visibility both into the products themselves and into common exposures across the financial system. This is an area where the Commission will be paying attention to what information the market needs, and down the road we may want to take steps to further improve transparency.

Fifth, today’s approach regarding the timing of reporting, and the dissemination of information to the public, is both progress and a compromise. The Commission will be requiring public dissemination of all trade information, including the notional amounts of security-based swaps, within twenty-four hours of execution. That’s progress, compared with the status quo of zero disclosure to the market. Further, this approach requires disclosure of notional amounts of trades and sets a floor for timing in later approaches to block trades, both of which advance transparency in this marketplace.

However, it’s less than what I might have hoped for in a final rule because it still requires the Commission to take further steps to develop thresholds for what constitutes a large block trade. Block trade rules are a necessary precondition to implementing the statutory mandate of real-time public dissemination of trade information. I’m satisfied, however, that the rule sets out clear directions and a timetable for our staff to conduct the necessary analysis to form an appropriate basis for setting block trade thresholds.

In sum, while the regulatory regime addressing the risks in derivative trading remains unfinished, these rules are an important step along the path toward executing our statutory mandates.

To that end, I want to thank the staff in the Division of Trading and Markets for their work on this important swaps market rule, including Michael Gaw, Jo Anne Swindler, Richard Vorosmart, George Gilbert, Angie Le, Kevin Schopp, Paula Jensen, Yvonne Fraticelli, Heather Seidel, Adam Yonce, David Michehl, Mia Zur, Puru Parthasarathy, Thomas Eady, and anyone else I’ve missed.

In addition, thank you to Scott Bauguess, Nahari Phatak, Sherman Boone, Vanessa Countryman, and Burt Porter, from the Division of Economic and Risk Analysis, and Lori Price from the General Counsel’s office.

I appreciate all the careful thought that has gone into these rules and look forward to supporting them and the necessary steps that follow.

Thank you.

[1] See, e.g., Timothy Geithner, Stress Test (2014) or Andrew Ross Sorkin, Too Big to Fail (2009).

[2] In their most basic terms, swaps are financial contracts that are designed to pay out, in theory, based on what happens to some other “reference” asset, like a stock or a bond. For example, if the referenced bond in a credit default swap stops performing, then the credit default swap provider is supposed to pay the other side.

[3] G-20 Leaders’ Statement after Talks in Pittsburgh, Sept. 25, 2009, available at

[4] See Rule 901(c)(1)(i) and 901(d)(5), among other elements of Rule 901, in Regulation SBSR.

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