In order to monitor systemic risks as near to real-time as possible regulators have introduced the requirement for market participants to report all OTC derivatives trading activity to swap data repositories (SDR).The aim is to boost transparency and surveillance capability. The idea is strikingly elegant, yet fraught with complexity when it comes to application by market participants.
The reporting is mandated through Dodd-Frank and EMIR. SDRs need to be registered with the respective authorities in the various regulatory regimes. For example, a few days ago the Commodity Futures Trading Commission (CFTC) provisionally authorised The Depository Trust & Clearing Corporation (DTCC) to create and operate a multi-asset class SDR in the U.S.
The DTCC is just one of a multitude of local and global trade repositories that will receive registered status. This creates a number of challenges for all market participants. Financial institutions need to decide which data to report to which repository. Sounds easy but:
- Which trades do you report to which repository?
- Do you need to report to more than one SDR?
- Where are you counterparties reporting to?
Some reporting requirements are not even finalised yet and with others it seems doubtful if they can sensibly be implemented. For example, ESMA asks in its current proposal that collateral which is held/posted against each individual trade is reported. This is tricky if you have netting agreements in place where there is an exchange of collateral based on the overall portfolio with a counterparty.
Most institutions do not currently have infrastructure designed to accommodate large real-time reporting requirements. Information is typically stored across various systems and siloed by product or business line.
Regulators will face the daunting task of bringing together a vast amount of data from the various sources globally, their goal being to enhance transparency, reduce systemic risk and find patterns that allow early intervention. Suddenly, ‘Big Data’ comes to mind and the task is not made easier when diverse reporting standards with differing data formats exist.
Another challenge is the recently fledgling global consensus on unique industry-standard identifiers that will be essential to the effectiveness of new reporting processes. In a CPSS-IOSCO consultation report on OTC derivatives data reporting and aggregation requirements, Unique Transaction Identifiers or Unique Swap Identifiers (UTI or USI), Legal Entity Identifiers (LEI) and a product classification system, known as Unique Product Identifiers (UPI), have been recognised as the prerequisite to effective data reporting and aggregation, with LEI und USI already in the definition/implementation phase.
There is a clear need for interoperability across SDRs and between regulators to overcome the challenges and make it easier for financial institutions to report the necessary data.
Coming up next week in our OTC clearing blog series is a deeper look into what LEIs can do for you.
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