A regulator changed course on data collection. Why?

By Jeanette Turner; Jean White, SEI

Published: 22 March 2021

HOW WE GOT HERE

After the 2008 global financial crisis, a broad range of investment managers faced a tsunami of regulatory reporting requirements across multiple jurisdictions. Filers not only need to aggregate data from multiple sources, normalise and enrich it to make it usable, but also frequently submit different data fields (and use different calculation methodologies) for reporting in different jurisdictions. It’s no wonder that to many, this continues to feel like an insurmountable task.

Compliance costs increased. New technology emerged and existing systems were rejigged to help in the process. It was, and continues to be, a challenging experience for all involved, but one deemed necessary by the regulators to aid in identifying trends and monitoring for systemic risk.

The CFTC

In the United States, a massive piece of financial reform legislation, the Dodd-Frank Wall Street Reform and Consumer Protection Act[1] mandated that the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) begin collecting information from investment advisers about the private funds they manage. Reporting on the resulting form, Form PF, began in 2012. 

Although not required to do so, the CFTC went beyond Form PF and produced its own reporting requirement, Form CPO-PQR.[2]  CPO-PQR would capture more Commodity Pool Operators (CPOs) than those caught under Form PF.  It required detailed information about commodity pools, including borrowings, trading and clearing mechanisms, value of aggregated derivative positions, geographical breakdown of pool investments, turnover rates, and liquidity and counterparty credit exposure.

The CFTC reasoned that it needed the additional information for several broad purposes, including: (1) increasing the CFTC’s understanding of its registrant population; (2) assessing the market risk associated with pooled investment vehicles under its jurisdiction; and (3) monitoring for systemic risk.[3]

Many of the questions were challenging to calculate and required numerous underlying assumptions that would vary from filer to filer.  Further, CPOs maintained information in different ways.  The CFTC took this into account and allowed filers a substantial amount of flexibility in the assumptions applied as well as calculation methodologies.

In addition to this, because the Form required a large volume of complex data, the CFTC did not require that reporting be done in real-time. Instead, the information could be reported on a delayed basis, with firms keeping track of their size to determine whether to report quarterly or annually.

 

THAT WAS THEN, THIS IS NOW

Today, the CFTC is effectively walking away from that requirement.  On 10 November 2020, the CFTC adopted amendments to Form CPO-PQR,[4] omitting most of the pool-specific details.  Gone is the asset liquidity and concentration of positions requirement.  So are clearing relationships, risk metrics, financing, as well as investor composition. 

It also transitioned to a more standard “one size fits all” filing, with the same reduced form to be submitted by all CPOs on a quarterly basis, regardless of AUM size.

 

WHY THE CHANGE?

The CFTC made the about-face for three main reasons:

1. Information was not being used

Some of the more detailed information for commodity pools was removed because the CFTC was not able to make full use of the information, as originally expected.[5]

The CFTC believed that the detailed pool-specific information would help it identify trends over time, including a pool’s exposure to asset classes, the composition and liquidity of a pool’s portfolio, and a pool’s susceptibility to failure in times of stress.

But, as CFTC Chairman Heath P. Tarbert pointed out in his supporting statement to the final rule, the “’garbage-in, garbage-out’ predicament—that is, the concept that flawed, or nonsense, input data produces nonsense output or ‘garbage’” applies to much of the CPO-PQR.[6]

As it turns out, somewhat unsurprisingly to some industry pundits, you cannot apply an apples-to-apples comparison across an industry when the data comes from firms applying different assumptions and utilising different calculation methodologies.  Add to that the infrequent and delayed reporting of the data and you have information that is unusable for spotting trends and monitoring for systemic risk.

2. Information could be found elsewhere

Some of the data could be found elsewhere, in a trusted, consistent format and on a timelier basis.

In revising the form, the CFTC mentioned that it had devoted substantial resources to developing other data streams and regulatory initiatives.[7] The CFTC found that these other data streams (which include information related to trading, reporting, and clearing of swaps), were often more useful, more robust and obtained in a more timely fashion than the information provided via the CPO-PQR filing.

The CFTC explained that most of the transaction and position information that is used for surveillance is available elsewhere and on a more frequent basis.[8] The added benefit of getting data in a more consistent format and on a timelier basis is that it makes it easier to combine the data into a holistic surveillance program.[9]

3. Regulatory priorities have evolved

When it first proposed the revisions, the CFTC stated that it was reassessing the Form’s scope and alignment with the regulator’s current regulatory priorities.[10]    

While looking after the best interests of the investor as well as the sustainability of the market as a whole, regulators must balance competing demands with limited resources.  In explaining its decision to revise the Form, the CFTC stated that “challenges with the data collected…combined with the resource constraints of broader [CFTC] priorities, have frustrated the [CFTC’s] ability to fully realise its vision for this data collection.”[11]  The CFTC determined that it could still monitor CPOs and their pools via other data streams.

In the end, the CFTC opted to prioritise its limited resources to pursue other key regulatory initiatives.

 

TAKE-AWAYS

Reducing reporting burdens takes intention

The CFTC could have left the CPO-PQR reporting requirement alone and simply not used the data. It also could have published guidance to rein in the flexibility it initially provided filers. Both could have frustrated filers and possibly still failed to provide the regulator what it needed.

But instead of doing these things, it acknowledged that it could not use some of the data for its intended purpose, and that it could get other data elsewhere that was just as good (if not better) for it to reach its new priorities. So it stopped collecting the data.

This is just one example of the CFTC’s ongoing efforts to review the regulatory use cases for reported data, as well as identify where other data channels can be accessed to achieve its ultimate objectives.

Regulatory priorities evolve---so should regulatory data practices  

Regulatory priorities shift with evolving financial markets, changes in government, and new unforeseen stress events.  This does not necessarily need to mean more regulation. Instead, such changes could simply mean different approaches to data analytics.  Progressive regulatory bodies are open to shifting regulatory reporting practices as markets evolve with the times.

Regulations are not static; firms cannot rest

Adjusting to the new regulatory world after the global financial crisis was quite a heavy lift. But there is no rest for the weary. Just as the reporting requirements became “business as usual” for firms, regulators altered reporting schemas, guidance, and reporting mechanisms.  As they become more sophisticated and learn more over time, regulators will continue to shift on what data they want and how such data will be used.

Asset management firms must have an agile process, utilising services and state-of-the-art technology, to accurately complete required regulatory filings. A change in schema or guidance should not overload in-house technology teams or disrupt the overarching business of the firm.  Even when the regulatory change seemingly makes reporting easier, there is still a process firms must go through to accurately capture the evolving requirements and subsequently enact the changes.  This process is made easier for those who have built partnerships with key service providers and subject matter experts.

 

The Investment Manager Services division is an internal business unit of SEI Investments Company. This information is provided for education purposes only and is not intended to be relied upon as legal or regulatory advice and information is subject to change. SEI does not claim responsibility for the accuracy or reliability of the data provided. Information provided by SEI Global Services, Inc.

 

[1] Public Law 111-203, 124 Stat. 1376 (2010).

[2] Commodity Pool Operators and Commodity Trading Advisors: Compliance Obligations, 77 FR 11252 (24 Feb.  2012) (“2012 Form CPO-PQR Final Rule”), https://www.govinfo.gov/app/details/FR-2012-02-24/2012-3390.

[3] 2012 Form CPO-PQR Final Rule at 11253-54.

[4] Compliance Requirements for Commodity Pool Operators on Form CPO-PQR, 85 Fed. Reg. 71772 (10 Nov. 10 2020), https://www.federalregister.gov/d/2020-22874 (the “Adopting Release”).

[5] Amendments to Compliance Requirements for Commodity Pool Operators on Form CPO-PQR, 85 Fed. Reg. 26378 (4 May 2020), https://www.federalregister.gov/d/2020-08496 (“the Proposing Release”), at 26380.

[6] The Adopting Release at Appendix 2 (Supporting Statement of Chairman Heath P. Tarbert).

[7] Ibid. at 71811.

[8] Ibid. at 71811.

[9] Ibid. at 71775.

[10] The Proposing Release at 26380.  

[11] The Adopting Release at 71775.