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DTCC Renews Call for Public Mandate Supporting Trade Repositories for OTC Derivatives
Testimony Calls for Changes in House Financial Services Committee Legislation
New York, October 8, 2009 — The Depository Trust & Clearing Corporation (DTCC) today called for legislative language mandating a trade repository for over-the-counter (OTC) credit derivatives contracts in testimony submitted to the House Financial Services Committee.
Larry E. Thompson, DTCC General Counsel, "As the operator of the only global trade repository, we have a unique perspective on its value in helping regulators mitigate systemic risk during a crisis. We believe that all derivatives traded by U.S. financial institutions should be reported to a single trade repository for each asset class, which would serve regulators as a comprehensive source of information. From a public policy perspective and in the interests of ensuring the stability and transparency of financial markets, there must be a consolidated, comprehensive single entity that collects and maintains the underlying position data and makes it available to regulators in the most efficient, timely and usable manner."
In the testimony, Thompson expressed concern that current legislative proposals, which require only those trades that are not cleared through a central counterparty (CCP) to be reported to a repository, could undermine the goals of re-regulation and represent a step backward by reducing the level of transparency that now exists in the marketplace.
"We are concerned that the legislative proposals under consideration would have the effect of denying regulators the opportunity to see systemic risk from a central vantage point because it would fragment the existing information on CDS contracts stored in the repository," Thompson said. "We strongly recommend that the draft legislation before the House be revised to ensure that all credit default swap trades, regardless of whether they are cleared or not, be reported to a single swap repository, which exists to provide regulators and the public with the consolidated information they need during normal times, and, especially, at times of crisis."
DTCC has publicly stated that it will support all efforts to create central counterparty (CCP) services planned in the U.S. and overseas on a non-discriminatory basis. Thompson stressed that when both the CCP and repository work in tandem to support each others functions, risk can be significantly mitigated -- and transparency enhanced in the marketplace.
"We are concerned that some in the OTC derivatives market may assume once a trade guarantee is provided through a central counterparty, there may be less need for a central registry to track the underlying position data," Thompson said. "We reject this view, based on our long experience managing the risk flowing from the failure of a single member firm. At the critical juncture of a firm failure, knowing the underlying position data of multiple transactions in a timely manner will be significant in providing transparency to regulators—and in protecting confidence in the market itself. We believe the role of having a central repository should be reinforced as a matter of public policy."
DTCC supports the goal of transparency and believes repository data should be shared with regulators in the U.S. and overseas. DTCC also supports the efforts of the OTC Derivatives Regulators' Forum, a group of international regulators who announced plans this week to develop a global framework for regulatory cooperation and to share ideas and information on CCPs and trade repositories serving the OTC derivatives market.
The Trade Information Warehouse not only provides essential information on the underlying position data of CDS transactions, but it also mitigates risk by handling the calculation, netting, and central settlement of payment obligations between counterparties, and automates the processing of "credit events" – situations where the protection against default provided by a credit default swap is activated.
Since last year, DTCC has seamlessly processed or is processing, through the Warehouse, more than 40 credit events, including the Lehman Brothers and Washington Mutual bankruptcies as well as the conservatorships for Freddie Mac and Fannie Mae. Because the industry had in place a robust, centralized infrastructure for the CDS market in the wake of last year's financial turmoil, market participants were able to manage the multiple processing and operational challenges they faced with a greater degree of certainty and efficiency.
Following the Lehman bankruptcy last year, DTCC played a significant role in unwinding over $500 billion in open trading positions from trades in equities, mortgage-backed and U.S. government securities, without any loss to the industry—and avoiding additional burden on taxpayers.
The Warehouse connects and services over 1,400 global dealers, asset managers, and other market participants.
To view the entire text of Thompson's testimony go to
http://www.dtcc.com/downloads/leadership/speeches/Congress_Testimony.pdf
About DTCC
The Depository Trust & Clearing Corporation (DTCC), through its subsidiaries, provides clearance, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. In addition, DTCC is a leading processor of mutual funds and insurance transactions, linking funds and carriers with financial firms and third parties who market these products. DTCC's depository provides custody and asset servicing for more than 3.5 million securities issues from the United States and 117 other countries and territories, valued at $27.6 trillion. In 2008, DTCC settled more than $1.88 quadrillion in securities transactions. DTCC has operating facilities in multiple locations in the United States and overseas.
DTCC Deriv/SERV LLC, a wholly-owned subsidiary of DTCC, provides automated matching and confirmation for OTC derivatives contracts, including credit, equity and interest rate derivatives. According to major market participants, over 95% of credit derivatives traded globally are electronically confirmed through Deriv/SERV. The Trade Information Warehouse, a service offering of Deriv/SERV launched in November 2006, is the market's first and only comprehensive trade database and centralized electronic infrastructure for post-trade processing of OTC derivatives contracts over their lifecycles, from confirmation through to final settlement.