Trade Repositories Top Regulatory Agenda

Terry Flanagan

International regulators are formulating rules for trade repositories, addressing issues of registration and access to information on a range of over-the-counter asset classes.

Since the establishment of the first trade repository for credit derivatives in 2006 by Depository Trust & Clearing Corp (DTCC), the U.S. securities post-trade group, repositories for other asset classes have been developed which regulators have begun tapping into in order to reduce the level of systemic risk that helped cause the 2008 financial crisis.

The Financial Stability Board (FSB), the regulatory arm of the G20 group of nations, which has assumed the lead role among regulatory bodies, is tracking regulations at the national level and seeking to smooth over differences.

“The FSB is co-ordinating implementation status, and addressing cases where differences are appearing,” said Stewart Macbeth, president and chief executive of DTCC Deriv/SERV, the DTCC subsidiary responsible for OTC derivatives. “There is a clear desire for harmony and consistency.”

Central reporting of OTC transactions is one of the three pillars of derivatives reforms, along with execution and central clearing.

Given the global nature of OTC derivatives transactions, a number of working groups and taskforces have been set up under the auspices of various international standard setting bodies such as the FSB, the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (Iosco).

In April, CPSS/Iosco published a final set of principles on financial market infrastructures (FMIs), which listed trade repositories as an FMI, along with payment systems, central securities depositories, securities settlement systems and central counterparties (CCPs).

“Although trade repositories had previously been discussed in the context of FMIs, this is the first time that a set of principles on trade repositories has been published in final form,” said Macbeth.

Of the U.S. regulators, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) are in the process of implementing rules governing swap data repositories.

“The submission of information to SDRs is an activity that takes place in many OTC markets today, and will not unduly burden those who must comply with the requirement,” said Christopher Giancarlo, executive vice-president of corporate development at inter-dealer broker GFI Group. “Ensuring that the [SEC and CFTC] receive current and accurate market data is a cost-effective method to mitigate systemic risk in the short-term.”

The European Securities and Markets Authority (Esma), the pan-European watchdog that was established in January 2011, has published draft standards intended to implement the upcoming European Market Infrastructure Regulation (Emir), which introduces provisions to improve transparency and reduce risks associated with the OTC derivatives market, and establishes common rules for CCPs) and trade repositories.

“Esma has published a consultation paper, which is in effect the first draft of rules,” said Macbeth. “They will look to have the rules finalized by the end of September, at which point they’ll be passed on to the European Commission.”

The Esma standards cover critical aspects of trade repositories, such as data access and registration.

In developing the draft technical standards on trade repositories, Esma has sought to build on the few existing pieces of international work, notably the June 2010 guidance by the OTC Derivatives Forum on access to credit default swaps data, the CPSS-Iosco taskforce on access to trade repository-held data and the proposed or adopted regulations by third countries.

However, these global standards aren’t specific enough “for the level of granularity that the standards are expected to take under Emir”, the Esma document said. “Esma therefore proposed to introduce more stringent requirements [including registration]”, it added.

“The gating factor in Europe will be registering trade repositories,” said Macbeth. “Esma is a new regulatory body, and trade repositories are the first direct form of infrastructure they will have to oversee.”

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.

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