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by Roland Kielman

Rep. Ed Royce (R-CA)

As members of the U.S. Congress expand their knowledge of the over-the-counter (OTC) derivatives market, a growing number are visiting DTCC for briefings on the company’s Trade Information Warehouse (TIW) and regulator portal for OTC derivatives.

Recent visitors included House Financial Services Committee members Rep. Ed Royce (R-CA), Rep. Steve Stivers (R-OH) and senior staff members from the Senate Banking Committee. Issues covered at the briefings included the potential unintended consequences of the Dodd-Frank Act on the OTC derivatives markets – specifically its impact on the ability of regulators to access comprehensive market data. Also discussed was the possibility of technical corrections being made to Dodd-Frank.

“We were delighted to meet with Congressmen Royce and Stivers, as well as the Senate Banking senior staff,” said Donald F. Donahue, DTCC president and CEO. “It is essential that market participants, regulators and lawmakers engage in proactive dialogue to limit the unforeseen negative consequences of Dodd-Frank. Our guests’ involvement in the House Financial Services and Senate Banking committees, respectively, allows them to serve as an important connection point between the financial and legislative communities, making them ideal partners in these efforts.”

Regulator portal and Dodd-Frank

The focal point of the visits was a demonstration of the TIW’s regulator portal capabilities and a discussion of how some Dodd-Frank provisions – specifically, extraterritorial requirements and the indemnification provision – could undermine the ability of regulators to access this critical tool.

DTCC’s warehouse serves as the centralized trade repository for the global credit default swaps (CDS) market, capturing and maintaining comprehensive data on more than 98% of all CDS transactions worldwide. The portal provides regulators throughout the world with direct access to aggregated data based on their oversight jurisdiction. It has become a powerful tool for regulators seeking greater transparency into this historically opaque marketplace. Currently, over 75% of regulators worldwide are registered to use the portal, including supervisors from the U.S., Europe and Asia.

DTCC has raised concerns about the indemnification provision in both the U.S. and Europe, which requires U.S.-registered trade repositories to obtain indemnification agreements from third-party (foreign) regulators before sharing information to which they are otherwise entitled. As drafted, this provision has the potential to undo much of the progress that has been made, as it would introduce roadblocks to existing data-sharing agreements – including the guidelines employed by DTCC’s portal that were developed in collaboration with a group of global regulators known as the OTC Derivatives Regulators Forum. These guidelines also received the support of two international standard-setting bodies – the Committee on Payment and Settlement Systems of the Bank for International Settlements and the Technical Committee of the International Organization of Securities Commissions (CPSS-IOSCO) – which recently issued a consultative report on OTC derivatives data requirements.

Shedding light on the issues

The potential ramifications of indemnification are receiving attention from lawmakers and regulators on both sides of the Atlantic, due in large part to DTCC’s sustained outreach program on this topic.

Rep. Steve Stivers (R-OH)

While the congressional delegations arrived with considerable knowledge, they remained curious about how exactly indemnification and extraterritoriality would impact U.S. regulators, market transparency and the ability of regulators globally to monitor and mitigate systemic risk. DTCC’s portal demonstration helped clarify the issues.

“By illustrating the granularity of data available to regulators through DTCC’s portal – and more importantly, the potential negative impact Dodd-Frank could have on the availability of this data to U.S. regulators – the demonstration serves as a powerful reminder of the potential for serious unintended consequences,” said Dan Cohen, DTCC managing director and head of government relations. “It becomes quickly apparent that in order to protect the carefully developed tools already available to the regulatory community, technical corrections to the Dodd-Frank Act need immediate attention.”

Technical corrections legislation

Because Dodd-Frank is federal law – thus legally mandating the application of the extraterritorial and indemnification requirements – the ultimate resolution of these issues will likely come from Capitol Hill in the form of a technical corrections bill.

While members of each delegation noted that such a bill would have little chance of succeeding before the 2012 elections, they acknowledged the importance of these issues, and indicated their willingness to help raise awareness and promote necessary policy corrections within their respective committees. @