Six years after the global financial crisis the regulatory response to that event has moved from consultation to implementation across Asia. Policymakers and regulators have focused on designing a system that will improve the transparency and integrity of financial markets.
The regulatory need for timely access to detailed and accurate data on global derivatives activity – one of the key lessons learned from the Lehman Brothers crisis, led G20 finance ministers in 2009 to agree that over-the-counter (OTC) derivatives trades should be reported to central repositories.
Today, major derivatives jurisdictions including Japan, Hong Kong, Singapore and Australia have enacted regulations requiring derivatives transactions to be reported to repositories. This will ultimately give regulators a clearer picture of systemic risk levels throughout the financial system.
The implementation of such regulations has been gradual. The scope of the reporting requirements has varied from jurisdiction to jurisdiction. However, almost five years since commitments were made at the G20 summit, a global reporting framework now exists.
While Asia is often seen as one financial market, the reality is that it is a mosaic of individual markets with different cultures, levels of financial market sophistication and views on regulations.However, financial institutions are looking at their reporting solutions holistically, rather than on a jurisdiction-by-jurisdiction basis.
Markets across Asia are also implementing regulations that impact a wide variety of market participants – small versus large firms, home-grown Asian companies versus major global players and financial versus non-financial firms.
In spite of this complexity, regulators in the region have adopted a pragmatic, phased approach to implementation across asset classes and market participants. Indeed, Asian regulators have demonstrated a collaborative and consultative approach, learning from overseas experience. Where jurisdictions outside of Asia have mandated that all reporting begin on a certain day, markets such as Singapore have phased in reporting requirements by asset class and segment, allowing market participants, regulators and the trade repository to deal with it in an orderly fashion.
The Depository Trust & Clearing Corporation’s (DTCC) Global Trade Repository (GTR) is the only repository in the world that supports regulatory reporting in the Asia-Pacific region for all five major derivatives asset classes, including credit, interest rates, equities, FX and commodities. It now processes two million submissions a week from across the region. This will grow as jurisdictions continue to embark on reforms.
However, challenges remain as the focus shifts from achieving regulatory compliance to ensuring that trade repositories play their role as a key risk mitigation tool.
As regulators move from data collection to interpretation they will be better able to identify risk in the system. Key requirements have led policymakers to require more transparency in the derivatives markets.
Firstly, to be really useful, data needs to be timely and accurate. Transparency is a critical goal, but timeliness and accuracy are necessary to achieve it.
Secondly, for data to be used to identify the build-up of systemic risk, it needs to be aggregated on a global basis. While trade repositories can fulfil this function in the future, regulators need to define the objectives of data aggregation. They need to identify what data is needed from a global perspective, both collateral and transaction data and outline how the information will be used. This requires understanding what regulatory agreements are already in place to govern information sharing between regulators and to address any data privacy issues.
Finally, technological implementation is the last part of the puzzle. Trade repositories can provide a solution to the existing reporting requirements on a global level and ultimately, provide data aggregation.
It is becoming increasingly evident that mandating trade reporting is not the final goal. Rather, more work is required to achieve the degree and quality of transparency that will guarantee the integrity of the global financial system.
Market participants have made significant strides in meeting new regulatory mandates. However, both regulators and the industry recognize that for trade reporting to reach its full risk management potential, a global convergence on reporting practices is crucial.
This article was first published in Regulation Asia on July 8, 2014