This blog post was originally published on FOW.
The Dodd-Frank Wall Street Reform Act (the DFA) requires agencies to promulgate hundreds of new rules. With the promulgation of these new rules, which generally require additional or different automation processes, come marketplace opportunities, including trading advantages that are often overlooked by those participants scrambling exclusively for DFA compliance. This obscure rule change could lead to opportunities concerning the lifeblood of trading – data.
A primary goal of the DFA was to increase transparency in the formerly opaque swaps market. The Commodities Futures Trading Commission (CFTC) issued a final rule imposing real-time reporting of transaction and pricing data and public dissemination requirements on registrants and registered entities for all publicly reportable swaps. Therefore, any arm’s-length transaction between two parties that results in a corresponding change in the market risk qualifies as a publicly reportable swap.
A publicly reportable swap transaction that is executed on or pursuant to the rules of a registered swap execution facility or designated contract market relieves the counterparties of an initial reporting obligation. Conversely, off-facility swaps are reported by a counterparty by means of a defined hierarchy, or alternatively by agreement.
In both instances transactional information must be reported to a swap data repository (SDR). Significantly, in either instance the real-time public reporting rule drastically expands the content and amount of disseminated transactional information. Which also means that the potential visibility of transactional information, also know as tick data, provides new and potentially significant opportunistic advantages for those market participants that have direct data access and an active cross-structural position management system.
The final rule requires dissemination of publicly reportable swap transaction, pricing and volume data through electronic means in a non-discriminatory manner. However, the rule provides a significant exception, known as the embargo rule.
The embargo rule, enumerated under Title VII §43.3(b)(3) expressly allows a designated reporting party to, in addition to reporting to a swap data repository, directly disclose transaction and pricing data relating to a publicly reportable swap transaction if: (i) disclosure is limited to market participants, customers or counterparties; (ii) disclosure is made at least concurrently with the transmittal of such data to a registered swap data repository; (iii) market participants are provided advance notice of such disclosure; and (iv) disclosure is non-discriminatory.
Taken together, the exception allows access to potentially pre-publicly disseminated transaction data to virtually any party affiliated with a swap dealer or major swap participant; or a member of a swap execution facility or designated contract market.
The pre-disseminated data is valuable because swap transaction data reported to a SDR may be significantly slowed. This is true because in some instances a SDR may require additional or comparative information from the counterparties or facility prior to public dissemination, which slows the process and concurrently gives market participants a distinct data possession time advantage. Also, a SDR must, according to the rules, parse and withhold identifying information. This anonymity processing requirement, when applicable, likely gives market participants a distinct data possession time advantage.
The pre-dissemination advantage can be seamlessly leveraged by monitoring and managing real-time data with a configured trading management infrastructure capable of cross-asset inputs and a compilation of both exchange-traded and intricate over-the-counter (OTC) swap data into a single comprehensive platform.
While the agencies promulgate new rules, traders and market analysts will generally require additional, different or enhanced automation processes to leverage the new opportunities that result.
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