Swap Data Repositories Cite Flaws in CFTC’s Market Data Plan

Terry Flanagan

Operators of swap data repositories (SDRs) and the data centers that house them are pushing back against a proposed “interpretative statement” from the Commodity Futures Trading Commission that would govern how SDRs share information with foreign regulators.

The statement from the U.S. futures market regulator could have unintended consequences of undermining the ability of global regulators and market participants to obtain a comprehensive and un-regimented view of market data, leading to increased systemic risk.

SDRs are already operating and expanding their operations to cover additional asset classes.

“Unlike mandatory clearing or electronic trading, the concept of SDRs and the way they are used to provide market transparency is well entrenched in the thinking of market participants now, and is largely reflected in existing or re-engineered market practices agreed in industry forums,” said Ryan Baccus, vice-president at Sapient Global Markets, a capital markets consultancy.

“From the perspective of the SDR construct, the only real uncertainty—aside from associated pending rules and clarifications—is how the regulators intend to utilize the mountains of data coming their way to fulfill their supervisory obligations.”

Operators of independent data centers, where many SDRs are housed, are concerned that they will become entangled in the regulatory issues related to SDRs.

“This interpretative statement does not seem to consider the great cost to the data center that hosts the SDR in assisting the SDR with compliance with foreign regulators,” said Peter Kavounas, president and chief executive of Cloud Strategix, a cloud computing and data hosting consultancy.

In particular, data centers would need to disclose confidential information about their operating policies to national regulators and, presumably, to the public.

That could indirectly detract from the attractiveness of cloud computing, which is starting to take hold in the investment industry.

“We have noticed an uptick in data management spending as global asset managers are evaluating their capability to respond to regulatory change,” said Jeremy Skaling, head of product management at technology provider Eagle Investment Systems. “We also see firms looking for secure cloud providers that can quickly deploy solutions and manage the infrastructure and services while allowing firms to focus on managing their business.”

The Dodd-Frank Act, a comprehensive reform of Wall Street, requires that U.S.-based swap data repositories obtain indemnifications from foreign regulators before sharing information.

The CFTC has tried to finesse the issue by permitting SDRs based in the U.S. to share information with their foreign counterparts without requiring indemnification, providing that the SDR is also registered with the foreign regulator.

The Depository Trust & Clearing Corp (DTCC), the U.S. securities post-trade group, noted that while the interpretative statement provides clarification it doesn’t provide complete resolution to concerns expressed by foreign regulatory authorities with respect to SDR access.

In particular, the difficulty of sharing data may cause foreign regulators to establish their own national repositories to ensure access to data.

The DTCC developed the first trade repository in the world for OTC credit derivatives, initially called the Trade Information Warehouse, which houses trade information on more than 98% of all the OTC credit derivatives globally.

The company has subsequently received industry approval, following a competitive process, to develop global trade repository services for equity, interest rate, commodity and foreign exchange OTC markets.

The DTCC’s global trade repository for interest rates was launched in December last year.

Since the vast majority of OTC interest rate derivatives trades are electronically confirmed through post-trade processor MarkitSERV, these trades flow into the trade repository automatically in near real time. Trade positions not confirmed in MarkitSERV are submitted directly by firms on a daily basis.

The DTCC began user testing of its global trade repository service for foreign exchange on May 1, and is planning full production by the fourth quarter of this year.

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