by Craig Donner
Larry Thompson, DTCC managing director and general counsel
Financial re-regulatory legislation passed by the U.S. Congress and signed into law by President Obama included a provision requiring all over-the-counter (OTC) derivatives transactions to be reported to a trade repository. The vote secured a top legislative priority for DTCC and the industry.
The successful outcome capped nearly two years of work by DTCC to educate lawmakers and regulators about the company and the critical role it plays in bringing greater safety, soundness, risk mitigation and transparency to the capital markets. DTCC leveraged its experience operating the Trade Information Warehouse, the global repository for the OTC credit default swap (CDS) market, to explain to lawmakers the importance of having both cleared and non-cleared trades reported to a repository.
The successful outcome capped nearly two years of work by DTCC to educate lawmakers and regulators about the company and the critical role it plays in bringing greater safety, soundness, risk mitigation and transparency to the capital markets. DTCC leveraged its experience operating the Trade Information Warehouse to explain to lawmakers the importance of having both cleared and non-cleared trades reported to a repository.
“DTCC’s goal was to maintain the current industry practice for CDS of reporting all trades to a repository, which would ensure regulators have a central vantage point to monitor and mitigate systemic risk,” said Larry Thompson, DTCC managing director and general counsel. “DTCC’s work during the recent Greek debt crisis, when we provided regulators, markets and investors in the U.S. and Europe with timely and reliable information about the nature and extent of CDS positions on Greek sovereign debt, was of particular interest to lawmakers and helped underscore our message about the value of reporting all trades to a repository.”
Risk of fragmentation
Throughout the legislative process, it appeared that Congress might require only non-cleared trades to be reported to a repository, which would fragment data and create multiple sources of different information for OTC derivatives.
“This would make it nearly impossible for any single regulator in a crisis to have access to all data globally to assess the potential threat,” Thompson said. “Regulators would be at a severe disadvantage when trying to get a timely, accurate and complete picture of the market.”
DTCC also tackled several other issues as part of its external affairs outreach, including opposing inclusion of the Lynch Amendment in the final bill. The amendment, which passed the House but not the Senate as part of its financial reform legislation, would have negatively impacted customers by placing strict ownership caps on certain trading platforms and clearing entities to prevent conflicts of interest.
As a result, DTCC joined with marketplaces and other infrastructure organizations in a letter to the Conference Committee calling for alternative language that would address Congress’ concerns in a more measured way.
The final legislation rejected the Lynch Amendment and instead requires the Commodity Futures Trading Commission (CFTC) to adopt rules, if necessary, to address conflicts of interest regarding dealer ownership of clearing entities and swap execution facilities.
Access to the Fed window
Another DTCC priority was ensuring that systemically important institutions like clearinghouses have access to all federal assistance, including short-term collateralized loans, through the Federal Reserve Bank Discount Window in the event that a future economic crisis sparks a short-term liquidity crunch.
While DTCC has never had to access the Discount Window in its 36-year history, including during the 2008 financial crisis, the Conference Report provides clarity to the law by allowing the Federal Reserve to act as a lender of last resort for clearinghouses. @