NY Fed report analyzes three months’ worth of CDS data.

Issues surrounding data quality must be resolved in order for post-trade transparency rules in OTC transactions to be effective, according to a report by the Federal Reserve Bank of New York.

Based on a study of transactions in the credit-default swaps market over a three-month period, the report concluded that reported prices “should be easily interpretable” and should be comparable over time for the same product.

“There needs to be a base level of product standardization, consistency in the grouping of products, and a comparable set of product characteristics,” the report said.

In its capacity as chair of the OTC Derivatives Supervisors Group, the NY Fed was given access to CDS transactions made over a three-month period between May and July 31, 2010, where at least one G14 dealer was counterparty to the trade.

DTCC Warehouse Trust, the global trade repository for CDS, facilitated the collection, anonymization, and transfer of the data to the NY Fed.

During its analysis, the NY Fed encountered several issues pertaining to data quality that need to be addressed in future reporting regimes.

An important requirement for consistent data reporting is the inclusion of unique identifiers fro reference entities and reference obligations in all databases.

Various global policy initiatives and industry efforts are underway to study and develop consistent data standards for OTC derivatives products.

The private sector has established repositories for credit, interest rate, and equity derivatives, but it’s also working to develop a system of Legal Entity Identifiers (LEIs), Unique Product Identifiers (UPIs), and taxonomies for the classification of OTC derivatives, according to the International Swaps and Derivatives Association.

“The industry needs to aggregate data across repositories to get a true picture of counterparty exposure and properly monitor systemic risk,” Tony Scianna, deputy head of strategy at SunGard’s capital markets business, told Markets Media. “Implementing legal entity identifiers is key to this.”

However, asking each market participant to report their exposure to a repository leaves too much up to chance.

“Each organization may have a different way of calculating their exposure,” said Scianna. “It would be like asking each taxpayer to tell the IRS how much tax they owe.”

Although public reporting requirements are expected to apply to execution-level information, prices and timestamps are not presently collected for CDS by Warehouse Trust, according to the report.

Both fields would eventually need to be collected for the purposes of real-time reporting (such information may also become more available with the increased use of electronic trading platforms).

At present, only the upfront payment on a transaction is collected by Warehouse Trust, not the execution price, the report said.

The timestamp collected does not indicate the time of the execution of the trade, but instead indicates when a transaction is submitted to DTCC for confirmation, which can differ from the time of trade execution by several minutes to several hours, depending on the product, execution method, and other idiosyncratic factors, according to the report.

Also, Warehouse Trust currently only collects and stores allocated trade sizes, rather than the details of the original market transaction, or block size, the NY Fed report said. This is problematic for those using the data as a basis for analysis and calibration of large trade thresholds, as using allocated level data would make trading appear to be more active and trade sizes smaller.

As such, if the trade repository is the entity assigned to disseminate transaction price information, it must either have a way of reaggregating the data to its block-level size for reporting purposes, or of capturing the data at the point of execution, the report said.