by Craig Donner
DTCC cautioned in May 25 testimony before a House Agriculture subcommittee that the indemnification provision of Dodd-Frank could create unintended negative consequences, including undermining efforts to enhance transparency and mitigate systemic risk in the over-the-counter (OTC) derivatives market. The hearing was called to discuss global harmonization, extra-territoriality issues and technical concerns with the implementation of the Dodd-Frank Act.
“The underlying legislative intent of the Dodd-Frank Act could be subverted by the legislative language, preventing the exchange of information between regulators and frustrating efforts to identify and mitigate international financial risk and fragment regulatory oversight on a jurisdiction-by-jurisdiction basis,” said Larry Thompson, DTCC managing director and general counsel, in testimony before the Subcommittee on General Farm Commodities and Risk Management.
Data fragmentation risk
Thompson said that foreign regulators are unlikely to grant U.S.-based swap data repositories (SDRs) indemnification in exchange for access to data as required by the Dodd-Frank Act. Without an indemnity agreement, SDRs may be legally precluded from providing critical market data to regulators overseas. As a result, foreign jurisdictions could be incentivized to create their own local repositories to avoid indemnification – a move that would lead to data fragmentation.
“A proliferation of local repositories around the world would make it very difficult to obtain aggregated data for any particular asset class, impair market and regulatory oversight, create inconsistencies in data, frustrate data analysis and increase systemic risk,” Thompson said. “There was no legislative history behind this provision, which was incorporated very late in the legislative process, nor was the indemnification requirement considered in the hearing process. DTCC believes the indemnification provision will significantly impede global regulatory cooperation.”
Addressing the issue
Thompson noted that while “technical correction” legislation would address the issue, he urged the Subcommittee to consider interim measures as well, including recognizing regulators that operate in a manner consistent with international agreements or regulatory forums, such as the OTC Derivatives Regulators Forum (ODRF), which includes maintaining the confidentiality of data. In addition, Thompson said modifications to the Dodd-Frank Act could include provisions that deem compliance with those international agreements or regulatory forums as consistent with the indemnification requirement.
The ODRF comprises nearly 50 regulators and other authorities worldwide, including all of the major regulators and central banks in the U.S. and Europe.
Question from Rep. Schmidt
Following Thompson’s testimony, Rep. Jean Schmidt (R-OH) asked him to explain in more detail the indemnification provision and how it would work if implemented. Thompson noted that regulators already protect the confidentiality of data based on the ODRF guidelines. He also reiterated his concern that foreign regulators would likely establish repositories in their own jurisdictions to avoid providing indemnity. @