The Treasury Department's Office of Financial Research ("OFR") recently finalized a new rule that will require daily reporting of certain transaction level data in respect of non-centrally cleared bilateral repurchase ("NCCBR") transactions (the "Rule").1 Reporting under the Rule will be made directly to OFR by certain financial companies (including certain U.S. investment advisers and the funds and clients they advise) that meet a threshold prescribed by the Rule. The approach to reporting under the new Rule is a marked departure from what market participants are accustomed to under other reporting regimes including the swap reporting rules (as discussed below).
In the Rule's adopting release (the "Adopting Release"), OFR noted that the reporting of NCCBR data will support the work of the Financial Stability Oversight Council ("FSOC"), its member agencies and OFR in their efforts to identify and monitor risks to financial stability. OFR further identified NCCBR transaction data as a "critical blind spot in a market that plays a key role in financial stability."
OFR also acknowledged the potential impact of new rules recently adopted by the Securities and Exchange Commission ("SEC"), particularly the SEC's new rule in respect of mandatory clearing of certain U.S. Treasury repurchase transactions. OFR noted that while it expects the number of reporting entities to significantly decrease following implementation of this clearing mandate, OFR's view is that the Rule is still needed in part due to the risks inherent to NCCBR transactions in respect of securities other than U.S. Treasury securities (e.g. OFR's view is that these remaining transactions typically involve riskier collateral and inconsistent margin mechanism standards).2
Under the Rule, reporting will be required by "financial companies" that fall within either of the following two categories:
- Category 1: an SEC registered securities broker or dealer or government securities broker or dealer whose average daily outstanding commitments to borrow cash and extend guarantees with respect to NCCBR transactions with counterparties over all business days during the prior calendar quarter is at least $10 billion;
- Category 2: Any other financial company that has over $1 billion in assets or assets under management, whose average daily outstanding commitments to borrow cash and extend guarantees with respect to NCCBR transactions, including commitments of all funds for which the company serves as investment adviser, with counterparties that are not SEC registered securities brokers or dealers or government securities brokers or dealers over all business days during the prior calendar quarter is at least $10 billion.3
"Financial companies" include banks and entities that are predominantly engaged in financial activities, in each case that are organized in the U.S.4 In the Adopting Release, OFR acknowledged the broad scope of potential types of reporting entities, including mutual funds, private funds and their investment advisers.
NCCBR transactions required to be reported will include all NCCBR transactions over all types of underlying instruments that the reporting party participates in,5 with limited exceptions, such as exceptions for transactions cleared through a central clearing counterparty or transactions involving a tri-party custodian.6 Market participants falling into Category 2 (including investment advisers and funds) should also note that, although NCCBR transactions with Category 1 entities are not taken into account for purposes of determining whether the Category 2 threshold has been met, once that threshold is met, all NCCBR transactions must be reported, including NCCBR transactions with Category 1 entities. NCCBR transactions with non-U.S. counterparties and foreign branches of U.S. counterparties must also be included. In addition, no substituted compliance is recognized by the Rule, meaning trades required to be reported pursuant to other regimes (including the European Securities and Markets Authority's Securities Financing Transaction Regulation) will need to be reported twice. Market participants that qualify as Category 2 reporters should also note that the Rule will involve dual-sided reporting and does not provide a hierarchy of reporting that defaults to dealers being responsible for reporting, as is the case under the swap and security-based swap reporting rules under the Dodd-Frank Act (the "swap reporting rules"). The Rule also does not include an exemption for reporting inter-affiliate NCCBR transactions.
With respect to reporting by investment advisers, the Rule and the Adopting Release specify that an investment adviser whose funds and other clients either separately or collectively meet the Rule's reporting threshold will need to report in respect of such clients, and will be required to include in their reporting transactions entered into by non-U.S. sub-advisers. Further, an investment adviser subject to reporting requirements must report all NCCBR transactions that it participates in, and not just NCCBR transactions participated in with respect to financial companies. Additionally, in a case where an investment adviser and a client whose assets it manages both exceed the reporting threshold, there is nothing in the Rule or the Adopting Release that indicates both parties would not need to report.
Reporting entities will be required to report the requisite NCCBR data on a daily basis, with reports for each business day due by 11:00 a.m. Eastern time on the following business day. The transaction level data that will be required to be reported is set forth in Table 1 of the Rule and generally includes principal trade information. OFR has also published Reporting Instructions and Technical Guidance notes on its website to assist market participants with navigating the logistics of reporting.7
Although data reported pursuant to the Rule is expected to be shared with FSOC, its member agencies and the Bureau of Economic Analysis, OFR stated that only "anonymized, aggregated, or otherwise masked data" will be shared with the public. Commenters to the Rule's proposal cited concerns around data protection and confidentiality. In response, OFR noted that it will comply with applicable privacy and data protection laws and regulations and that it will require any regulatory agencies that receive business confidential information utilize appropriate confidentiality and security protocols in accordance with applicable law.
Reporting entities will be permitted to delegate reporting to a third party subject to several constraints, including that a reporting entity may only delegate to a single third party at a time, and a reporting entity must provide 90 days' advance notice to OFR of any proposed change in the submitting entity. Consistent with the swap reporting rules, OFR noted in the Adopting Release that any such delegation does not absolve reporting entities of their responsibility for the data submission and compliance with the Rule.
Reporting entities will need to take into account a number of other practical considerations in respect of reporting, including obtaining and maintaining a legal entity identifier (or LEI) for the parties to NCCBR transactions as well as for an investment adviser complying with its own reporting obligations under the Rule. Additionally, reporting entities will need to understand the reporting status of their trading counterparties to accurately calculate whether or not they exceed the relevant reporting threshold in the Rule. Category 2 entities will want to carefully consider how their advisory relationships are set up (particularly with respect to sub-advisory and separately managed accounts) in order to determine which entity (or entities) bears the reporting obligation under the Rule.
The Rule will become effective on July 5, 2024. The compliance dates for Category 1 and 2 reporters are December 2, 2024 and April 1, 2025, respectively. For entities that qualify as Category 1 and Category 2 reporters after the Rule's compliance date, the Rule provides for grace periods before reporting must commence, as well as procedures for ceasing reporting for entities that fall below the reporting threshold for four consecutive quarters.
Footnotes
1. Ongoing Data Collection of Non-Centrally Cleared Bilateral Transactions in the U.S. Repurchase Agreement Market, 89 Fed. Reg. 37091 (May 6, 2024) available at: https://www.govinfo.gov/content/pkg/FR-2024-05-06/pdf/2024-08999.pdf
2. OFR also noted the SEC's recent amendments related to the definitions of "dealer" and "government securities dealer" but concluded that such amendments are not likely to result in many (if any) additional firms becoming subject to NCCBR transaction reporting requirements under the Rule.
3. Note that banks are included in Category 2, but not Category 1.
4. More specifically, the Rule adopts the definition of "financial company" set forth under Title II of the Dodd Frank Act.
5. Participation in NCCBR transactions includes entry into NCCBR for ones' own account, guaranteeing NCCBR and causing a fund or client to enter into a NCCBR transaction.
6. The Rule also expressly excludes transactions conducted under a Securities Lending Agreement or Master Securities Lending Agreement as well as repurchase transactions arising from participation in a commercial mortgage loan or the initial securitization of a residential mortgage loan. OFR clarified in the Adopting Release, however, that buy/sell back transactions are included in the scope of transactions covered by the Rule.
7. Available at: https://www.financialresearch.gov/data/collections/non-centrally-cleared-bilateral-repo-data/.
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