The CFTC says the cost of reporting swap trades will be minimal. One lawyer begs to differ.
One facet of Dodd-Frank touted as having little impact on the derivatives users is trade reporting. The Commodity Futures Trading Commission, under Dodd-Frank, will require, “robust recordkeeping and reporting requirements for all swaps transactions.”And it frequently says that the costs maintaining and reporting these transactions are minimal enough to not warrant actually determining the cost.
But Steven Lofchie, co-chairman of the Financial Services Department at Cadwalader, Wickersham and Taft in New York and reportedly a staunch Democrat, sees it another way. Writing in the Harvard Business Law Review Mr. Lofchie says that under the CFTC’s proposed rules, “firms entering into swaps regulated by the CFTC must report somewhere around 30 or 40 data items about the swap within 15 minutes of the trade.”
Among these data, he said, would be the requirement of revealing whether the swap is uncleared, which means it will be part of a separately negotiated collateral agreement, and whether it’s a “bespoke” swap – “which the CFTC defines as a term, not reported, that is ‘material’ to the transaction.”
Reporting this much information is bound to be expensive, Mr. Lofchie writes. Further, not only could it potentially be costly, but the information can rapidly become useless in the current configuration of proposed reporting requirements. If either of the above two boxes – uncleared or bespoke – is checked, he writes, “all the rest of the 30 or 40 data items of information reported to the CFTC are essentially worthless.” More to the point, even if the two boxes are not checked, “the other 30 or 40 fields of information are just too much data to be cheap to deliver, and too little data to be useful.”
That’s not how the CFTC sees it, however. In its Federal Register notes for December 9, 2010, the CFTC says that with respect to costs, it has determined that “for swap dealers and major swap participants, costs to institute recordkeeping and reporting systems and personnel in order to satisfy the new regulatory requirements are far outweighed by the benefits to the financial system as a whole…” and “it is expected that the any additional cost imposed by the recordkeeping requirements of proposed regulations … would be minimal because the information and data required to be recorded is information and data a prudent swap dealer or major swap participant would already maintain during the ordinary course of its business.”
Treasurers know – and have known for some time – that the costs of using derivative under Dodd-Frank will go up for everyone, whether they are an exempt corporate end-user or a non-exempt bank. The cost of the gathering all the required records is where the pinch will be. And any costs that banks bear will most assuredly seep into the fees it charges its corporate clients.
“Dodd-Frank just does not work. It’s a horror show,” Mr. Lofchie writes. It’s bad and in the current circumstances of a tepid economic recovery and money is extremely limited the world cannot afford bad regulation.
“In the best of all Panglossian worlds where there was an infinite amount of money to be spent on financial regulation, both as to the costs of compliance by the regulated and as to the costs of regulation by the government, these questions of practicality and benefit would not matter,” Mr. Lofchie writes. “If the regulators adopt rules that don’t work, it is just money down the drain; plenty more where that came from.”
We are not in that world, Mr. Lofchie writes, and “the way in which we spend our regulatory dollars does matter.” Certainly corporations and their treasurers would agree.