Dispatch From DTCC GCF Repo Index Recent Events

Recently, DTCC has participated in multiple events highlighting the DTCC GCF Repo Index®, which is the first and only index that tracks the average daily interest rate paid on overnight transactions in the multi-billion dollar market for General Collateral Finance repurchase (GCF Repos®) agreements.

CFTC and IOSCO Roundtable

On February 26, the Commodity Futures Trading Commission (CFTC) and the International Organization of Securities Commissioners (IOSCO) held a roundtable to discuss the IOSCO Consultation Report, “Financial Benchmarks.” The roundtable, along with the comment letters and a roundtable discussion previously held in London, are meant to inform the IOSCO Final Report containing principles of best practices for benchmark methodologies and governance.

DTCC participated in the event which was moderated by CFTC Chairman Gary Gensler and Jacqueline Mesa, Director, Office of International Affairs. Additional panelists included representatives from the buy-side, exchanges, market utilities and end users.

The roundtable centered on the principles of the benchmarks and whether all indices should be included under the principles. The group also discussed whether the benchmarks should be anchored by observable transactions and how the market can transition away from relying on the benchmark(s), if regulators determine that LIBOR and/or other benchmark(s) should no longer be used.

During opening remarks, the CFTC noted that while anchoring does not require continuous transactions, it requires enough transactions to make it a reliable benchmark. It was also highlighted that a significant amount of market data raises LIBOR questions, and therefore a more robust framework is necessary.

During a discussion on viable alternatives to LIBOR and stability of the market, DTCC’s ability to meet many of the needs currently met by LIBOR was highlighted. The GCF Repo Index’s ability to address problems presented by LIBOR was brought up and included discussion regarding how indices are returning to rates based on transparent, cleared, deep markets that have sustainability on a long-term basis.

Global Financial Markets Association

On February 28, DTCC participated in a Global Financial Markets Association (GFMA) event, “The Future of Global Financial Benchmarks,” focusing on the industry’s commitment to ensuring structural changes are made to restore trust and confidence in the effective functioning of markets. The event included a panel on market implications of recent industry and regulatory actions which included discussion on the DTCC GCF Repo Index.

The event kicked-off with a panel on industry best practices and GFMA’s Principles for Financial Benchmarks, which is a collaborative effort by financial institutions across the globe. The event’s keynote address was delivered by CFTC Chairman Gary Gensler, who also serves as co-chair of IOSCO’s Board Level Task Force on Financial Benchmarks. DTCC participated in the market implications panel hosted by the Financial Times’ Martin Dickson. Additional panelists included Harry Lipman from Bloomberg, Sam Priyadarshi from Vanguard, James Wallin from Alliance Bernstein and Peter Moss from Thomson Reuters. During the panel, the risks involved in moving quickly with benchmark regulations and how firms are approaching regulations given the massive financial undertaking required were discussed. Market innovation and benchmark design and methodology were also key themes.

DTCC’s focus during the panel included discussion regarding transaction-based data submissions verses opinion-based data. The DTCC GCF Repo Index was discussed as a potential alternative to LIBOR. Attendees were given an overview of the index including its basis on cleared funding transactions through the clearing house on a daily basis, as opposed to subjective rate estimates. This key difference which guards against manipulation of the index and provides greater transparency and enhanced risk mitigation was stressed, in addition to DTCC’s various controls to reduce the possibility of manipulation. The panel closed by discussing potential benefits of the recent regulatory attention on benchmarks and highlighting lessons learned that may assist in improving the system moving forward.

For more information on the DTCC GCF Repo Index, please visit https://www.dtcc.com/products/fi/gcfindex/

Friday, 01 March 2013

LEI is Live

The collapse of Lehman Brothers demonstrated to regulators worldwide that having a global standardized system of identifying counterparties was crucial to increasing transparency, processing efficiency and mitigating risk in the financial marketplace. The creation of a Legal Entity identifier (LEI), a universal initiative supported by the G20, addresses this situation.

At Sibos, I participated in a joint session with Paul Janssens, SWIFT’s LEI Program Director, to discuss the U.S. interim solution to the global LEI challenge. CICI, which is short for CFTC Interim Compliant Identifier, was launched by regulators under the SWAPS reporting rules and is jointly managed by DTCC and SWIFT.

SIBOS was a great opportunity to demo our solution to key Asian market firms, and to show some of the important features such as support for local language characters.

The CICI database is live and contains approximately 30,000 legal entities from 114 countries. While LEIs will be required for transactions in all asset classes, establishing identifiers for entities trading in OTC derivatives is the immediate focus for the global regulatory community.

The CICI utility is based on a cost recovery model. There is a minimal charge for entities to register and certify data, however, accessing the data is free. Several vendors are already offering services to assist market participants in managing and maintaining this data.

Paul Janssens highlighted that while all data submitted to CICI will be validated by a group of experts, the model empowers the financial community to manage its own data set. Questions were raised regarding maintaining the accuracy of data. Our team reinforced CFTC requirements which place responsibility on the owner of the LEI record. We shared that from our experience in data management, a process of open challenge further enhances the quality of the data.

Conference attendees also inquired about fraud prevention measures. I explained how our highly experienced team reviews each new record to ensure the data is accurate. While anyone can challenge existing data, it can only be altered if the current data is proven to be incorrect. In the event that data requires an update, registrants will be notified that a change has been made.

We closed the session by outlining that CFTC reporting using CICI codes is eminent. Many global firms are actively registering or certifying their reportable legal entities and for those yet to start, it is time to mobilize.

The CICI utility went live on August 21, 2012 and can be viewed at www.ciciutility.org

Wednesday, 31 October 2012

Standards and Trade Repositories

Discussions regarding standards are a recurring topic of debate at Sibos. However, this year’s standards and trade repositories panel was particularly timely given the role that trade repositories play in improving transparency and mitigating systemic risk in the global OTC derivatives marketplace.

The G20 commitment to build and implement trade repositories in the OTC derivatives market is being implemented with the support of ISDA and AFME, who have run a competitive RFQ process to identify preferred suppliers for Credit, Equity, Interest Rates, FX and Commodity trade repositories.

However, to ensure that global regulators can fully benefit from access to transaction data in a timely and accurate manner, reporting standards are more important than ever.

A panel discussion with Karel Engelen of ISDA and Joe Halberstad and Malene McMahon of SWIFT focused on the role of standards, the ability to leverage existing standards and anticipated future developments.

During the panel, I shared DTCC’s experience in the credit derivatives markets, which created the precursor to the ‘trade repository’ concept and was the by-product of our electronic credit derivatives trade confirmation system. Our experience in running the CDS repository taught us that derivatives’ trading is a global business and that standardisation aids transparency.

We also discussed the unprecedented opportunity to create transparency in the global OTC derivatives markets. In order to do so, it is important to keep a comprehensive set of data on a global basis. The more data that is contained in the trade repositories, the more data sets regulators will be able to access. To achieve these aims, data input needs to be flexible to maximise usage, and data output needs to be harmonised to provide aggregate, common data for the ‘end users’ i.e. the regulators.

The G20 has provided an important framework for improving the transparency of the global OTC derivatives market. The driver for reducing complexity in the global trade repository community will, however, be market forces rather than regulation. To reconcile data between multiple trade repositories, global standards and common identifiers are critical.

Wednesday, 31 October 2012

Harmonising the Asia bond market: What’s next?

I recently participated in a Sibos panel discussion on the development of a common platform for bond trading across the Asian region. Panel participants included Alexandre Kech of SWIFT, Jason Lee of the Asia Development Bank, Yuji Sato of JASDEC and Mike Tagai of JP Morgan Chase. The discussion highlighted progress made to date and my focus included lessons learned from the European experience of harmonisation.

Feedback from the panel centered around the fact that while the initiative to harmonise Asia’s bond markets has been around since the early 2000s, real progress has only been made since 2010 with the establishment of the Asia Bond Market Forum (ABMF). The ABMF is a common platform to foster standardization of market practices relating to cross-border bond transactions in the region.

Much effort has gone into mapping transaction flows within and between the participating member states. As a result, a 1,500 page standardised bond issuance guide covering eleven countries was published earlier this year. Panelists highlighted the focus on creating common documentation and efficient markets, with a goal of improving transaction flows and increasing straight through processing.

At the highest level, problems faced by the Asian bond market remind me of the EU, although the Asian region’s problems remain exacerbated by the absence of common legal framework, common currency and common tax rates. I noted that addressing simple issues and gradually making progress in tackling the more difficult ones are key to success.

Asia also appears to have implemented a bottom-up approach where the market is more involved in the development of the solution as compared to the European top-down approach driven primarily by lawmakers and regulators. As seen in Europe, the Asian process cannot avoid moving through the cycle of denial (that you have a problem), acceptance (that you do have a problem and it needs fixing) and finally implementation. ABMF believes the initiative is now past the denial stage and well into acceptance.

If Asia is to succeed in harmonising its rules and increasing market efficiency, lessons learned from the European experience of implementing a large pan-regional project will come in handy. From my experience these include keeping the scope tight, making sure that the initiative has a relevant business case, disengaging politics and business and remembering that frequent, smaller steps can be more impactful than fewer, bigger ones. This approach should lead to a more efficient bond market, and as a result, a more active market with greater liquidity and fewer risks.

Wednesday, 31 October 2012

Trade Repositories: Global versus Local

Trade repositories, one of the major pillars of systemic risk management in the global OTC derivatives markets, were the subject of an interesting panel discussion at Sibos today.

As the operator of a trade repository long before the term was coined by current regulations, I was pleased to report on the progress DTCC has made in developing global multi-asset class repositories. For the first time, this enables regulators around the world to have access to crucial data sets which they need to monitor risk concentrations and exercise their regulatory oversight.

DTCC's experience in developing and operating a repository for the credit default swap market demonstrated the value and certainty that global data sets bring to the market and its supervisors. This also led DTCC to develop a global footprint with data centers not only in the US, but in Asia (Singapore) and Europe (Netherlands) as well.

As a key tool in market oversight and systemic risk management, it is important to highlight the many requirements that need to be met in order for a trade repository to satisfy the Financial Stability Board standards for these infrastructures. Foremost among these is ensuring accurate data aggregation by instituting appropriate controls and ensuring that the data is accurate before and upon aggregation. If data is aggregated incorrectly, the result will almost certainly lead to misreporting on the size of the market, which runs counter to the certainty which the regulators and the market need today.

Esmond Lee from the Hong Kong Monetary Authority (HKMA) spoke of the importance of trade reporting to ensure robust post-trade transparency in the new OTC products coming out of emerging markets. For these reasons, the HKMA developed a trade repository for local market players to facilitate market surveillance and to help the growth of new products, such as renmimbi denominated derivatives. At the same time, however, an agreement reached between the HKMA and DTCC will enable U.S. institutions to report trades to DTCC’s trade repositories and thus avoid duplicate reporting.

Franco Passacantando of Banca D’Italia said that central banks need accurate and global data sets, independent of whether the trade repository is based in Europe. What is important, he stated, is neutrality, access to data and a framework which ensures that regulators have oversight of the repository. As an example, the Italian central bank’s access to DTCC data was cited as very useful for its financial stability overview – namely the understanding of counterparty exposures to Italian sovereign debt.

This example brings me to an important point. Transparency through voluntary trade reporting is already happening, prior to mandatory requirements. This has ensured that prudential supervisors already have the ability to see transaction level data – data that can be converted into valuable information for use in monitoring systemic risk.

DTCC’s experience in operating trade repositories tells us that the industry wants the ability to report transactions once; the regulators want to have access to all data sets relevant to the oversight of their jurisdiction; and they want them reported in a standardized way to ensure they have a timely and accurate view of liquidity and risks. These objectives can only be achieved through a global repository or, for markets with unique needs such as Hong Kong, through global data sharing agreements.

Tuesday, 30 October 2012

Arm yourself for cyber war - are you next?

Is talk of cyber warfare overblown? This was the opening question at today’s Sibos panel discussion on cyber warfare moderated by the Financial Times’ Paul Taylor. The ensuing debate reinforced the fact that, far from being overblown, existing and future cyber threats are very much on the minds of institutions throughout the world.

One of the current concerns was pointed out by David Ballantyne of the National Bank of Australia, who highlighted the ability of cyber attackers to inflict heavy damage using just a few machines. This is particularly problematic in an age where banks increasingly interact with their clients over the internet, where they are at their most vulnerable to cyber-attackers.

Srood Sherif of the National Bank of Abu Dhabi further highlighted that the attacks can now come from any part of the world and that cyber-attackers are part of a very profitable industry, which in addition to criminal activity is increasingly moving into areas such as espionage.

I could not agree more with their remarks.

For my part, the panel discussion provided a valuable opportunity to talk about the cyber threats of the future. At DTCC, we refer to these threats with the acronym “CHEW” (a term coined by former Whitehouse Cyber Security advisor Richard Clarke), which is short for Crime, Hacktivists, Espionage and War. While we are all relatively familiar with crime-related activities in cyberspace, it is “HEW” element that presents the most significant concerns for the future.

Hacktivists are motivated by the need to get their messages into cyber space and are increasingly doing so. Those engaged in cyber espionage want to gain advantages by securing information in what has become and will continue to be a lucrative market. And in an age where military and political power is increasingly reliant on digital communications networks, cyber-war will increasingly be a tool in the pursuit of political or military gains.

To win the war against CHEW, we need to move from a world where we ‘farm’ security alerts and prevention and detection tools to a situation where we actively ‘hunt’ for cyber-attackers in our networks.

Panellists agreed that preparing for and anticipating threats at the source will be crucial to the success of efforts to combat cyber threats. Information is key and more cooperation, not just between participants in the financial services sector, but also with our colleagues in other critical sectors such as telecommunications and energy, is crucial to limiting the impact of this new and ever-evolving threat.

Tuesday, 30 October 2012

Evolution or Revolution for Securities Market Infrastructures

The dramatic changes occurring across the financial markets as a result of the global financial crisis – particularly the increasingly central role expected to be played by securities markets infrastructures – continues to be a dominant theme in the industry. Today, more than four years after the outbreak of the crisis, these and other changes mandated by the G20 have not yet been fully implemented due, in large part, to the size and scope of the proposals.

Attendees at this year’s Sibos Conference in Osaka, Japan, have been discussing whether these changes will represent an evolution of existing structures or the revolution that many believe is necessary to avoid a repeat of the financial disaster. On Monday, I participated in a Sibos panel to discuss these issues. As you might expect, the conversation was lively with panelists expressing a range of views on the topic.

In his opening address, Dominic Hobson, Editor-in-Chief of Global Custodian, said that not only has a revolution in market infrastructure failed to materialize, but that evolution has also failed to occur, in particular when it comes to addressing the issues of the previous crisis. His view was that risks are being shifted and redistributed, but not reduced and that compulsory central clearing will lead to a shortage of quality collateral.

During the panel, I took time to explain the role of central counterparties (CCPs) in managing a major financial firm's default and their ability to protect individual firms from shouldering this difficult task. I also highlighted that while CCPs will indeed require high-quality collateral, any potential shortage problem represents an opportunity for innovative collateral transformation services to be provided by multiple intermediaries. If there is a wide-scale liquidity problem in the market, CCPs are one set of actors that will need to act collaboratively with market regulators, central banks and financial institutions to untangle the knots and minimize the potential damage. Tim Howell, CEO of Euroclear, added that while risk can be mitigated, it cannot be completely eliminated.

On the subject of market infrastructure, John Gubert, Chairman UniCredit GSS Executive Committee, UniCredit, asked if the current structure is the right one and whether it can it deal with the onset of a large scale problem. He also raised questions over whether market infrastructure and risks are being looked at closely enough.

Today’s discussion highlighted the wide range of opinions on the topic of market infrastructures and whether actual reform is truly in motion. For those of us managing the many issues related to compliance with countless new regulatory requirements, it was a reminder that there are many different perceptions of what is needed and what has been achieved. The debate has only just begun.

Monday, 29 October 2012