Mar.HFS Subcommittee Discusses the Swap Data Repository and Clearinghouse Indemnification Correction Act
At a House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises hearing on March 21, lawmakers heard from Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), and Depository Trust & Clearing Corporation (DTCC) officials about discussion draft, the Swap Data Repository (SDR) and Clearinghouse Indemnification Correction Act, sponsored by Reps. Robert Dold (R-Ill.) and Gwen Moore (D-Wis.), which would repeal the indemnification requirements under the Dodd-Frank Act and would require U.S. or foreign regulators seeking access to swap data from an SDR to provide assurances that the regulator abide by certain confidentially requirements.
Chairman Scott Garrett (R-N.J.) said repeal of the indemnification requirements under Dodd-Frank are needed to avoid fragmentation of data-collection efforts and increase transparency. Garrett said market participants need clarity from regulators in regard to how Dodd-Frank rules will apply extraterritorially and referenced a bill he sponsored with Rep. Jim Himes (D-Conn.), H.R. 3283, the Swap Jurisdiction Certainty Act, which he said may be marked up by the Full Committee next week.
Rep. Maxine Waters (D-Calif.) said the indemnification provision in the Dodd-Frank Act is “admittedly problematic” and after hearing from both panels agreed that the legislation discussed today is “absolutely necessary.”
Moore said the bill reflected bipartisan collaboration and that it does nothing to compromise established legal frameworks or protections with regard to data-collection measures.
Question and Answer
Rep. David Schweikert (R-Ariz.) asked what conflicts will arise from the Dodd-Frank indemnification provision. Dan Berkovitz, General Counsel for the CFTC, said foreign regulators have raised concern that they would be subject to U.S. tort law under the provision. Ethiopis Tafara, Director of the SEC Office of International Affairs, added it would be legally impractical for regulators to implement.
Waters asked what authorities the SEC and CFTC have to rectify the indemnification issue that does not involve Congressional action. Berkovitz pointed to the interpretative guidance he referenced in his testimony that CFTC staff is working on to make clear the Commission’s views on the indemnification provision. He said the guidance will be released for public comment in the next several weeks. Tafara said the SEC has authority to rectify the indemnification requirement but taking such a route would leave a measure of uncertainty while legislative action would provide the certainty needed for market participants.
Rep. Robert Hurt (R-Va.) asked if the agencies have taken a position on the bill discussed today. Berkovitz said the CFTC has not taken a position and Tafara said the SEC supports the legislation and its objective.
Moore asked what data-sharing arrangements the SEC and CFTC have already established with foreign entities. Berkovitz said confidentially provisions are included in the Commodity Exchange Act that permit the sharing of information if foreign regulators prove the data will be adequately protected, noting that the system has worked well in the past. Tafara said the SEC has entered into more than 40 arrangements with regulators as it pertains to enforcement and supervision efforts and said such memoranda of understanding (MOUs) make clear the conditions under which information is provided and can be used.
Moore also asked about the benefits and liability issues of pursuing a level plenary access playing field. Berkovitz said the CFTC has begun to discuss the issue with its international counterparts. Tafara added that plenary access is a major concern among foreign regulators.
During the second panel, Hurt asked DTCC President and CEO Donald Donahue what remedies would be available to entities hurt by the misuse of data by regulators. Donahue said that in the unlikely event regulators misuse data, affected entities would be able to pursue remedies under the relevant country’s regulatory jurisdiction.
Moore asked how plenary access would adversely impact the ability of regulators and financial entities to respond to financial crises. Donahue said that plenary access may motivate international regulators to create local SDRs to avoid confidentially issues. Under a plenary access regime certain regulators may have more privileged access to data than other regulators, therefore the creation of local SDRs that would collect data from firms under that local jurisdiction would protect against the possibility of foreign regulators accessing data beyond the general requirements. Donahue said SDR fragmentation would inhibit regulators’ ability to ascertain the whole picture when, as an example, seeking to identify the degree of exposure a specific country’s financial firms have to a certain risk.
Rep. Steve Stivers (R-Ohio) noted that the discussion draft does not deal with the plenary access issue and asked Donahue if it should be addressed in the bill. Donahue said plenary access and indemnification issues are related and that both provisions should be addressed in the legislation.
Testimony
In his opening statement, Tafara discussed how the indemnification requirement in the Dodd-Frank Act presents a barrier to U.S. and foreign governmental entities’ ability to obtain data from a security-based SDR. Tafara noted that some foreign regulators may establish local trade repositories that would not be registered with the SEC in order to circumvent the indemnification requirement, which would likely result in fragmentation and inefficiency with regard to collecting and obtaining information. He also said U.S. and most other foreign governmental entities lack the legal authority to enter into the indemnification agreement required by Section 763(i) of the Dodd-Frank Act. Tafara referenced a comment letter submitted to the SEC by the European Securities and Markets Authority (ESMA) expressing concerns that the “indemnification requirements undermine the key principle of trust underlying the exchange of information between the SEC and European Union regulators.” Tafara also voiced the SEC’s concern with statements by certain foreign regulators about their intention to adopt reciprocal indemnification requirements, noting that the “SEC would be legally unable to meet any such indemnification requirement and has argued vigorously against similar requirements in other contexts.”
In his opening statement, Berkovitz provided an overview of how the Dodd-Frank Act would modify the Commodity Exchange Act to provide for confidentially and indemnification agreements with regard to the sharing of data among domestic and foreign governmental entities. Berkovitz referenced a final rule the Commission approved last year on SDR registration and core principles that provides for certain circumstances in which foreign and domestic regulators would be able to obtain data from an SDR without executing a confidentiality and indemnification agreement. Berkovitz noted a directive by CFTC Chairman Gary Gensler for staff to draft additional interpretive guidance stating the “Commission’s view that access to swap data reported to a trade repository that is registered with the CFTC will not be subject to the indemnification provisions of the Commodity Exchange Act if such trade repository is regulated pursuant to foreign law and the applicable requested data is reported to the trade repository pursuant to foreign law.”
In his opening statement, Donahue said the two key extraterritorial provisions in the Dodd-Frank Act that “risk fragmenting global swap data” are the confidentiality and indemnification provisions and the plenary access duties of SDRs. Donahue pointed to provisions in Dodd-Frank that require SDRs registered with the CFTC or SEC to provide “direct electronic access to the Commission.” He said foreign regulators are concerned with the ambiguity of the requirement and the potential for regulators to interpret the provision in overly broad manner by requiring SDRs to provide access to all swap data
even when there are no direct ties to U.S. regulatory requirements. Donahue said DTCC supports the bill and noted DTCC’s work with its global partners in designing repositories that meet the regulatory requirements of respective jurisdictions. Donahue also wrote an op-ed in The Hill newspaper today discussing the indemnification issue.
For testimony and a webcast of the hearing, please click here.
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At a House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises hearing on March 21, lawmakers heard from Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), and Depository Trust & Clearing Corporation (DTCC) officials about discussion draft, the Swap Data Repository (SDR) and Clearinghouse Indemnification Correction Act, sponsored by Reps. Robert Dold (R-Ill.) and Gwen Moore (D-Wis.), which would repeal the indemnification requirements under the Dodd-Frank Act and would require U.S. or foreign regulators seeking access to swap data from an SDR to provide assurances that the regulator abide by certain confidentially requirements.
Chairman Scott Garrett (R-N.J.) said repeal of the indemnification requirements under Dodd-Frank are needed to avoid fragmentation of data-collection efforts and increase transparency. Garrett said market participants need clarity from regulators in regard to how Dodd-Frank rules will apply extraterritorially and referenced a bill he sponsored with Rep. Jim Himes (D-Conn.), H.R. 3283, the Swap Jurisdiction Certainty Act, which he said may be marked up by the Full Committee next week.
Rep. Maxine Waters (D-Calif.) said the indemnification provision in the Dodd-Frank Act is “admittedly problematic” and after hearing from both panels agreed that the legislation discussed today is “absolutely necessary.”
Moore said the bill reflected bipartisan collaboration and that it does nothing to compromise established legal frameworks or protections with regard to data-collection measures.
Question and Answer
Rep. David Schweikert (R-Ariz.) asked what conflicts will arise from the Dodd-Frank indemnification provision. Dan Berkovitz, General Counsel for the CFTC, said foreign regulators have raised concern that they would be subject to U.S. tort law under the provision. Ethiopis Tafara, Director of the SEC Office of International Affairs, added it would be legally impractical for regulators to implement.
Waters asked what authorities the SEC and CFTC have to rectify the indemnification issue that does not involve Congressional action. Berkovitz pointed to the interpretative guidance he referenced in his testimony that CFTC staff is working on to make clear the Commission’s views on the indemnification provision. He said the guidance will be released for public comment in the next several weeks. Tafara said the SEC has authority to rectify the indemnification requirement but taking such a route would leave a measure of uncertainty while legislative action would provide the certainty needed for market participants.
Rep. Robert Hurt (R-Va.) asked if the agencies have taken a position on the bill discussed today. Berkovitz said the CFTC has not taken a position and Tafara said the SEC supports the legislation and its objective.
Moore asked what data-sharing arrangements the SEC and CFTC have already established with foreign entities. Berkovitz said confidentially provisions are included in the Commodity Exchange Act that permit the sharing of information if foreign regulators prove the data will be adequately protected, noting that the system has worked well in the past. Tafara said the SEC has entered into more than 40 arrangements with regulators as it pertains to enforcement and supervision efforts and said such memoranda of understanding (MOUs) make clear the conditions under which information is provided and can be used.
Moore also asked about the benefits and liability issues of pursuing a level plenary access playing field. Berkovitz said the CFTC has begun to discuss the issue with its international counterparts. Tafara added that plenary access is a major concern among foreign regulators.
During the second panel, Hurt asked DTCC President and CEO Donald Donahue what remedies would be available to entities hurt by the misuse of data by regulators. Donahue said that in the unlikely event regulators misuse data, affected entities would be able to pursue remedies under the relevant country’s regulatory jurisdiction.
Moore asked how plenary access would adversely impact the ability of regulators and financial entities to respond to financial crises. Donahue said that plenary access may motivate international regulators to create local SDRs to avoid confidentially issues. Under a plenary access regime certain regulators may have more privileged access to data than other regulators, therefore the creation of local SDRs that would collect data from firms under that local jurisdiction would protect against the possibility of foreign regulators accessing data beyond the general requirements. Donahue said SDR fragmentation would inhibit regulators’ ability to ascertain the whole picture when, as an example, seeking to identify the degree of exposure a specific country’s financial firms have to a certain risk.
Rep. Steve Stivers (R-Ohio) noted that the discussion draft does not deal with the plenary access issue and asked Donahue if it should be addressed in the bill. Donahue said plenary access and indemnification issues are related and that both provisions should be addressed in the legislation.
Testimony
In his opening statement, Tafara discussed how the indemnification requirement in the Dodd-Frank Act presents a barrier to U.S. and foreign governmental entities’ ability to obtain data from a security-based SDR. Tafara noted that some foreign regulators may establish local trade repositories that would not be registered with the SEC in order to circumvent the indemnification requirement, which would likely result in fragmentation and inefficiency with regard to collecting and obtaining information. He also said U.S. and most other foreign governmental entities lack the legal authority to enter into the indemnification agreement required by Section 763(i) of the Dodd-Frank Act. Tafara referenced a comment letter submitted to the SEC by the European Securities and Markets Authority (ESMA) expressing concerns that the “indemnification requirements undermine the key principle of trust underlying the exchange of information between the SEC and European Union regulators.” Tafara also voiced the SEC’s concern with statements by certain foreign regulators about their intention to adopt reciprocal indemnification requirements, noting that the “SEC would be legally unable to meet any such indemnification requirement and has argued vigorously against similar requirements in other contexts.”
In his opening statement, Berkovitz provided an overview of how the Dodd-Frank Act would modify the Commodity Exchange Act to provide for confidentially and indemnification agreements with regard to the sharing of data among domestic and foreign governmental entities. Berkovitz referenced a final rule the Commission approved last year on SDR registration and core principles that provides for certain circumstances in which foreign and domestic regulators would be able to obtain data from an SDR without executing a confidentiality and indemnification agreement. Berkovitz noted a directive by CFTC Chairman Gary Gensler for staff to draft additional interpretive guidance stating the “Commission’s view that access to swap data reported to a trade repository that is registered with the CFTC will not be subject to the indemnification provisions of the Commodity Exchange Act if such trade repository is regulated pursuant to foreign law and the applicable requested data is reported to the trade repository pursuant to foreign law.”
In his opening statement, Donahue said the two key extraterritorial provisions in the Dodd-Frank Act that “risk fragmenting global swap data” are the confidentiality and indemnification provisions and the plenary access duties of SDRs. Donahue pointed to provisions in Dodd-Frank that require SDRs registered with the CFTC or SEC to provide “direct electronic access to the Commission.” He said foreign regulators are concerned with the ambiguity of the requirement and the potential for regulators to interpret the provision in overly broad manner by requiring SDRs to provide access to all swap data
even when there are no direct ties to U.S. regulatory requirements. Donahue said DTCC supports the bill and noted DTCC’s work with its global partners in designing repositories that meet the regulatory requirements of respective jurisdictions. Donahue also wrote an op-ed in The Hill newspaper today discussing the indemnification issue.
For testimony and a webcast of the hearing, please click here.