09.27.2011
By Terry Flanagan

Global Solutions Pushed for OTC Data

ISDA responds to international regulators on operation of trade repositories.

The private sector has responded to calls by international regulators for an effective infrastructure for OTC trade repositories.

Not only has it 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.

A joint report issued by the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) recommends the creation of a system of Legal Entity Identifiers (LEIs), continued international consultation regarding implementation of LEIs, and international work to develop an international product classification system for OTC derivatives.

ISDA, in a comment letter to CPSS/IOSCO, notes that fragmentation of trade repositories will introduce operational complexity, undermine risk reduction and impose unnecessary costs. Therefore, any solution needs to be global in nature, utilized by all participants, and delivered in a phased approach.

“We’re observing a vast expansion of global rulemaking, and a coming deluge of data – especially in the derivatives markets,” said Dan Hubscher, industry manager, capital markets at Progress Software. “It’s very expensive and distracting to fix problems after the fact.”

The CPSS/IOSCO report makes recommendations on minimum data reporting requirements, access to data, methodology and mechanism for aggregation of data, and development of a standard international product classification system.

The report noted that the development of trade repositories for different asset classes has accelerated following the G20’s Sept. 2009 commitment to OTC derivatives reforms.

ISDA has launched initiatives to ensure recording of OTC derivatives at the global level for four major asset classes: interest rate derivatives, equity derivatives, credit derivatives and oil derivatives.

The Trade Information Warehouse and the Equity Derivatives Reporting Repository, operated by subsidiaries of Depository Trust and Clearing Corp. (DTCC), currently collect data on credit derivatives and equity derivatives, with reporting done by the G14 dealers.

ISDA selected DTCC in March 2011 to develop a repository serving the OTC interest rate derivatives markets, and chose DTCC Deriv/SERV and EFETnet to develop a commodity derivatives trade repository, to be operational in the first quarter of 2012.

Other infinitives are also underway internationally, the report noted.

ISDA, in its comment letter, advocated the use of a single “Counterparty Exposure Repository” to provide for an aggregated risk view for regulators.

ISDA noted that the CPSS/IOSCO report is correct in identifying a gap in trade repository reporting, in that repositories were designed for transactional level reporting and not portfolio level reporting.

The report is also correct in highlighting that in order to understand exposure properly, this needs to be done across asset classes, hence across repositories, ISDA said.

LEIs can facilitate the calculation of portfolio-level exposure (between pairs of counterparties), rather than having to build up this information by aggregating multiple transactions across multiple repositories.

The Counterparty Exposure Repository would be in place of requiring valuation data or current exposure information on a transaction level, which would represent a “computationally intensive and technically difficult task,” said ISDA.

“We recommend that regulators focus on collecting exposure information from the respective participants, rather than aiming at computing valuation calculations themselves,” said ISDA. “This latter approach would be of limited value for standardized products, while it would face extremely difficult challenges for the more complex ones.”

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