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DTCC Reaches MilestoneHouse Passes Legislation to Remove Indemnification Provision from Dodd-Frank Act

The U.S. House of Representatives in June passed legislation that would eliminate provisions of the Dodd-Frank Act that could inhibit global data sharing for over-the-counter derivatives (OTC) markets – provisions that DTCC testified against before Congress on several occasions.

“DTCC has been a strong proponent of enhancing the transparency of OTC derivatives markets and maintaining the current level of data sharing that has helped make these markets the most transparent in the world,” said Larry Thompson, DTCC Managing Director and General Counsel. “June 12 marked a milestone in these efforts when the U.S. House of Representatives passed the Swap Data Repository and Clearinghouse Indemnification Correction Act of 2013 (H.R. 742) by an overwhelming majority of 420-2.”

Identifying the Issue

Dodd-Frank’s original indemnification provision required U.S.-based swap data repositories (SDR) to obtain indemnification agreements from foreign regulators prior to sharing critical market data with them. “This provision was intended to ensure the confidentiality and safety of data reported to and provided by SDRs,” explained Ali Wolpert, DTCC Vice President, U.S. Government Relations. “However, the reality is that U.S.-registered SDRs may be legally precluded from providing regulators market data on transactions that are subject to their jurisdiction without an indemnity agreement.”

Thompson explained that the issue of indemnification is problematic for several reasons, but none more so than the fact that the concept itself doesn’t exist in many foreign legal systems. “Many countries do not recognize indemnification as a legal concept. And even in countries where they do, many foreign governments cannot or will not agree to indemnify foreign, private third parties such as U.S. registered SDRs – in much the same way that a U.S. regulator would be unwilling to indemnify a trade repository in another country,” he stated.

In order to avoid indemnification, global supervisors would be forced to establish local repositories, a move that would lead to data fragmentation. A proliferation of local trade repositories would undermine the ability of regulators to obtain a timely, consolidated and accurate view of the global marketplace, Thompson said.

“DTCC applauds the House for taking decisive action to maintain the current high level of transparency of over-the-counter (OTC) derivatives markets,” stated Thompson. “H.R. 742 will help ensure that regulators and the public continue to have access to a consolidated and accurate view of the global marketplace, including concentrations of risk and market exposures. The Senate should move swiftly in taking up this bipartisan legislation and resolve issues surrounding the indemnification provisions and confidentiality requirements of the Dodd-Frank Act.”

Congressional support

Sponsors of the legislation were Congressman Rick Crawford (R-AR), Congressman David Scott (D-GA), Congressman Bill Huizenga (R-MI), and Congresswoman Gwen Moore (D-MI). Comments from the sponsors in support of H.R. 742 included:

  • Crawford said: “In removing the indemnification requirement, Congress would assist the SEC, as well as other regulators, in securing the access it needs to data held in global trade repositories.”
  • Scott stated: “I strongly support this very simple but necessary bill that will help to facilitate greater information-sharing, as intended by Dodd-Frank, and I encourage my colleagues to do the same.”
  • Huizenga said “As you can see, this legislative solution is a small technical fix to the Dodd-Frank Act, but it’s desperately needed and is vital to maintaining the integrity of domestic and global derivatives market regulations, so I urge the swift passage of H.R. 742.”
  • Moore stated: “H.R. 742 ensures information regarding the global swap market will be available to U.S. and foreign regulators, which will enhance the global transparency and oversight of derivatives markets.”

“This bipartisan effort to correct a problem with Dodd-Frank is not an attempt to weaken the bill — it is an attempt to make good legislation better,” said Congresswoman Carolyn Maloney (D-NY). “This bill will go a long way toward furthering a major goal of the Dodd-Frank reforms, which is sharing data and collaborating with foreign entities to reduce global systemic risk.”

The legislation was unanimously reported out of the House Agriculture Committee earlier in the year and passed the House Financial Services Committee in a 52-0 recorded vote.

DTCC Support

During the 112th Congress, a bipartisan coalition of more than 40 lawmakers in the House signed on as co-sponsors of legislation identical to H.R. 742. Since the introduction of a technical fix to address issues surrounding Dodd-Frank’s indemnification provisions, DTCC has been a staunch advocate for a legislative solution. Michael Bodson, DTCC President and CEO, Chris Childs, DTCC Data Repository (U.S.) LLC (DDR) CEO, and Thompson each testified on different occasions before Senate and House Committees in support of legislation that would resolve issues surrounding Dodd-Frank’s indemnification provisions and confidentiality requirements.

With House passage of the legislation, H.R. 742 now goes to the Senate for consideration. While resistance is anticipated due to procedural hurdles in the Senate, DTCC is continuing to encourage Congress to move swiftly and enact legislation to address the unintended consequences of indemnification and help create a more stable and secure financial system.@