Piecing together the big picture
Championed by global regulators and
politicians following the financial crisis, the trade repository promises a
means to reduce systemic risk by increasing transparency in derivatives markets.
To deliver on this promise, any solution needs to provide a global picture,
says Andrew Douglas, head of European government relations at clearer the
Depository Trust & Clearing Corporation (DTCC).
"When you're trying to get a picture
of systemic risk in financial markets, especially during times of crisis, the
last thing you need to worry about is whether you have all the data, whether
some of it is missing or how you're going to piece it all together,” he says.
“You want to be able to go to one source and have a complete, accurate and
timely view of the risk."
Defined as a legal entity that centrally
collects and maintains the records of financial market transactions, regulators
have seized on the ability of repositories to make derivatives market positions
and potential risk concentrations fully visible to regulators and investors. In
line with Group of 20 recommendations, the impending European market
infrastructure regulation (EMIR) calls for all derivative trades to be reported
to a trade repository so that position data can be collected and monitored.
As a US post-trade utility, the DTCC is
putting itself forward as a possible global provider of trade repository
services. But its ambitions are being challenged by the establishment of local
and regional trade repositories across parts of Europe and beyond. This raises
an important question about the completeness of the data that is being
collected – and ultimately its use to regulators and investors. Douglas is
emphatic that a global solution is necessary.
"Having too many regional or national
repositories would lead to data fragmentation, which would hamper regulatory
oversight,” he says. “The whole point is to have a clear, accurate and complete
picture of the market, and we believe having a global repository for each of
the main OTC derivatives asset classes is the best solution."
Nevertheless, the DTCC recognises that
other repositories, such as REGIS-TR, a European trade repository launched by
Spanish exchange group Bolsas y Mercados Españoles and Germany’s Deutsche Börse
in December 2010, are part of the landscape. Its solution has been to adopt
bilateral relationships, based on information sharing, wherever possible.
"Whilst European and US markets are
more integrated, in less homogenous regions, such as in Asia, there may still
be a role for national repositories,” he says. “We have therefore been working
to establish partnerships with regional repositories based on data sharing
agreements. We provide the global picture, and they provide us with the local
data. This agreement is to the benefit of everyone."
fact from fiction
Accurate data that can provide investors
with a realistic picture of outstanding risk has not always been easily
available. The collapse of Lehman
Brothers in 2008 provides a case in point. At that time, Douglas recalls, market
rumours suggested US$400 billion would change hands on credit default swaps
naming Lehman Brothers as the reference entity. This rumour caused some degree
of market panic, unsettling global financial markets.
However, data held by the DTCC’s Trade
Information Warehouse, a trade repository for credit derivatives, showed an
actual gross payment figure of around US$72 billion and a net notional amount
of nearer to US$6 billion. When this data was made public, the rumour was
promptly quashed – and for Douglas, a defining moment in the rise of the trade
repository had been reached.
At present, the DTCC publishes aggregated
anonymised data on a weekly basis via its website. Regulatory access to the
data is guaranteed by the cooperation of global regulators participating in the
OTC Derivatives Regulators Forum, a body of more than 40 regulators covering
global derivatives markets.
But there is a potential fly in the
ointment. In the US, the Dodd-Frank Act requires US-based swap data
repositories to obtain indemnification from third-country regulators before
sharing market data. Many regulators have indicated that it would be near
impossible for them to agree to such a condition – meaning US-based repositories
could be precluded from providing market data to global regulators.
"The main concern is that this could prompt
an increase in the number of local repositories, to avoid indemnification, which
would fragment the data,” says Douglas. “That would run against the G20 aim of
increasing market transparency.”
US regulator the Securities and Exchange
Commission has indicated that it would be willing to support a redrafting of
the Dodd-Frank Act to remove the section on indemnification. That is currently
contested by the Commodity Futures Trading Commission, which favours a re-write
of the existing text instead of outright deletion. But Douglas is hopeful that,
with current negotiations in play, the issue can be resolved.
In Europe, the European Securities and
Markets Authority is currently drafting the technical standards for central
clearing and reporting of OTC derivatives contracts. EMIR is due to take effect
in early 2013.