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by Helen Cunningham

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The Game Plan

DTCC is extending its presence in Asia with a strategy designed to raise awareness of the company and its global capabilities in key Asian financial centers. The infrastructure DTCC is building for the over-the-counter (OTC) derivatives market is a major focus of this undertaking. Over the past 18 months, DTCC has been actively reaching out to Asian regulators, officials, infrastructure organizations and market participants to make the case for a single global repository to house OTC derivatives data. The selling points of this groundbreaking project are that it will:

  • Help regulators around the world manage systemic risk by providing near-real-time access to OTC derivatives data from a single, comprehensive source;
  • Help firms better understand their counterparty exposures;
  • Give market participants the ability to meet reporting requirements in multiple jurisdictions using one system;
  • Enable public disclosure of aggregate data regarding the markets;
  • Contain the costs of achieving these objectives.

  • Why now?

    The convergence of several factors underlies the OTC derivatives push in the Asia region. In 2011, DTCC won industry mandates to build OTC derivatives repositories for three additional asset classes (interest rates, foreign exchange or FX, and commodities) adding to its already existing repositories for credit and equity derivatives. Now, DTCC is building a system called the Global Trade Repository that will house a global data set across multiple asset classes, with a single point of connectivity, in geographically dispersed data centers. For this repository to mitigate systemic risk globally, it must capture data from all the major markets, including those in Asia, so that regulators have access to the aggregate global data that is necessary for systemic risk oversight.

    “Several Asian markets are significant players in OTC interest rate and FX derivatives – and the value of contracts in those asset classes dwarfs values in the CDS market,” explained Michael Bodson, DTCC’s COO.

    For instance, as of June 2011, outstanding contracts for interest rate derivatives totaled US$553.9 trillion, of which 12%, or US$65.5 trillion, was yen-denominated. That is double the value of all the contracts in the U.S/Euro-centric CDS market, which totaled US$32 trillion for the same period.

    “Because Asian-Pacific countries play an important role in OTC derivatives markets, it is essential to gain their support for the Global Trade Repository and to build a system that meets their requirements,” said Bodson. “It is clearly in the best interest of regulators, the industry and the general public to avoid the creation of multiple infrastructures and the resulting data fragmentation.”

    Existing customers of DTCC are also eager for the company to build a single repository, according to Marisol Collazo, DTCC Managing Director, Trade Information Warehouse. “The Global Trade Repository will give firms the ability to report their trades once and meet multi-jurisdictional reporting requirements,” she said. “It’s a win-win because it will simplify compliance with reporting requirements across borders, dispense with the need to connect to multiple platforms and give firms the data they need to manage their own risks – all of which helps lower their costs.”

    Other drivers of DTCC’s push to gain support in Asia for a single repository include:

    • Asian financial reform: Many countries in the region are in the midst of financial reform, with some of the major markets now finalizing legislation and moving to the implementation stage. Like reforms in the U.S. and Europe, a priority is to bring greater transparency and risk reduction to OTC derivatives markets. Asian countries that are major players in the OTC derivatives space are expected to issue their rules on Jan. 1, 2013.
    • Western financial reforms: E.U. and U.S. regulations will create new reporting requirements for Asian financial institutions that have clients in these regions, starting as soon as July 2012 in the case of Dodd-Frank.
    • CPSS-IOSCO: In January 2012, this body issued a final report strongly supporting the central collection, maintenance and dissemination of OTC derivatives data by trade repositories “to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.” (CPSS-IOSCO refers to the Committee on Payment and Settlement Systems of the Bank for International Settlement and the technical committee of International Organization of Securities Commissions. At the request of the G20’s Financial Stability Board, CPSS-IOSCO worked with the OTC Derivatives Regulators’ Forum – ODRF–to develop its recommendations for OTC trade repositories.)

    Addressing concerns

    A critical issue for Asian authorities is whether the Global Trade Repository will guarantee them access and control over their country-specific data, according to Collazo. If the U.S. or Europe were to limit data access – whether because of legislative changes, a system outage or a breakdown in diplomatic relations – Asian regulators want full assurance that they will retain access to their data.

    To address this concern, DTCC will be building a data center in Asia. “We plan to have multiple data centers, including one in Asia, with each facility retaining a full data set,” said Collazo, noting that this approach also strengthens business continuity. “Authorities in Asia will have the ability to receive their information from an Asian data center.” (The location of the Asian facility has not yet been determined.)

    Privacy and data-disclosure policies are another important aspect of the dialogue in Asia that must be addressed in order to discourage local builds, according to Collazo. “We are working on a governance and oversight model for Asian markets that will protect the data and ensure the repository’s independence,” she said, adding that the goal is to create a broad governance model rather than something for each country. “We are also exploring ways to address disclosure concerns with technology and workflow solutions.”

    Gaining traction

    Although the concept of an OTC derivatives repository is relatively new in Asia, some authorities there are already using DTCC’s Regulators’ Portal to monitor systemic risk, according to Collazo.

    “Familiarity with our portal is an important foundation for us in discussions with Asia regulators and legislators,” she said. “Similarly, awareness of our role in working with the ODRF to provide transparency in the CDS market is opening doors for us in Asia.” In March, DTCC attended an ODRF meeting in Hong Kong and presented an update on its Asia repository strategy. Collazo pointed to two other devel-opments as examples of growing recognition for the repository’s value proposition in Asia. The Japan Financial Services Agency has proposed legislation that would permit foreign trade repositories to operate in Japan. And Hong Kong, which has opted to build its own repository, has agreed to use the Global Trade Repository as an agent to send and receive data, which will facilitate the collection of a global data set while permitting Hong Kong to maintain local data control.

    As for DTCC, Bodson summed up the vision for the Global Trade Repository in Asia this way. “Our goal is to bring Asian markets on board by demonstrating that DTCC has the technology, know-how and people to satisfy the needs of regulators and firms in Asia, as we have already done in the U.S. and Europe.” @