EU and US industry and regulatory figures have warned that the number and nature of repositories listing over-the-counter (OTC) derivatives trades is threatening to blind regulators to market risk.
OTC trading is done directly between two parties, without any supervision of a stock exchange, in contrast with exchange trading.
Stock exchanges facilitate liquidity, help mitigate risk concerning the default of one party in the transaction, provide transparency and maintain a current market price. In an OTC trade, the price is not necessarily available to the public.
The collapse of Lehman Brothers in 2008 – which triggered the financial crisis – led to calls by the G20 in 2009 for the introduction of swap data depositories, in order to bring clarity to the OTC marketplace.
“To meet the G20 objective, The Depository Trust & Clearing Corporation (DTCC) [a US-headquartered global post-trade services provider] suggested the optimal model would be to establish one trade repository per asset class, providing a centralised point of access for regulators around the world,” said Larry Thompson, the DTCC’s vice chairman and general counsel told EURACTIV in an interview.
“But what has happened, unfortunately, is that instead of one trade repository per asset class, 25 trade repositories have sprung up around the world,” Thompson said.
Commercial value of data
DTCC operates the largest trade repository in the world, but there are now four such depositories in the US and six in Europe, and many others around the world, several which entered the market looking to leverage data as a commercial opportunity.
“We’ve always said that trade repositories and their data should not be used for commercial purposes. Data should be collected and shared for public good, aiding market transparency and reducing risk,” the lawyer warned.
David Wright, the Secretary General of the International Organization of Securities Commissions (IOSCO), the global standard setter for the securities sector which works with the G20 and the Financial Stability Board (FSB) on the global regulatory reform agenda, echoed Thompson’s warning during a speech made to the recent (3 April) Financial Services Conference in Brussels.
“Well we’ve got 25 of these beasts [repositories] today and they don’t talk to each other, so a basic fundamental trawl of transparency is actually missing, and we in IOSCO have a role to get this done. We need standard product and legal identifier(s), but this [current situation] is not a good thing,” said Wright a former deputy director-general for securities and financial markets with the EU executive.
“We agree with David Wright that there needs to be some rationalisation of the market in order to achieve the transparency goals set out by the G20,” said Thompson.
Their warnings were underlined by Elke König, the chair of the new European Single Resolution Board.
Resolution board boss agrees about dangers
“I think we have some areas where the regulators must do a better job. One of those is OTC derivatives reform, where we have a lot of competition going on and we have to sort that out,” König told the same conference.
“If regulators do not have access to a consistent data set across jurisdictions and are prevented from accessing data due to legal barriers that limit data sharing, it becomes impossible to monitor international exposure of derivatives and compare risk across borders,” Thompson warned.
“It is critical that regulatory authorities have accurate and reliable data on OTC derivatives,” an EU official told EURACTIV.
“It is essential that regulators globally can aggregate data in the swiftest and most effective way possible,” the official added.
The G20 agreed in 2009 that derivatives traded over-the-counter, or privately, among banks should be centrally cleared and reported to a repository by the end of 2012.
These commitments were taken in the wake of the 2008 financial crisis, as a way to curb the kind of market volatility that threatened to send the world economy into a second Great Depression.
On 15 September 2010, the European Commission tabled a proposal for a regulation on OTC derivatives, central counterparties – intermediaries between buyers and sellers – and trade repositories.