Larry Thompson, DTCC Managing Director and General Counsel, and Chairman of the Board of DTCC Deriv/SERV LLC
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law four years ago and since then, the regulatory implementation of these reforms has turned into a marathon. While Congress may have sprinted to enact Dodd-Frank, over the past 1,460-plus days since the legislation became law, regulators have altered their pace and focused on simply crossing the finish line.
While progress has been made in a relatively short period of time, a significant amount of work still lies ahead. Take, for example, the role Dodd-Frank envisioned for trade repositories. Congress mandated that all swaps transaction be reported to swap data repositories (SDRs) to ensure that regulators and the public have transparency into the global over-the-counter (OTC) derivatives markets as a way to mitigate systemic risk.
Today’s reality is that regulators are no longer faced with a lack of data but rather with the challenge of deriving critical information from that data to effectively monitor risk and exposure. The financial industry has learned that while the act of collecting and transmitting the data appears fairly straight-forward, it is a complicated process. The bigger challenge, however, lies in the ability to standardize, analyze and draw conclusions from it.
Despite a near universal understanding of the critical role played by trade repositories, a lack of regulatory harmonization could unravel progress that’s already been achieved in bringing transparency to this market. Differences in data reporting standards and access, privacy laws and sharing requirements across jurisdictions only serve to complicate efforts to aggregate data. These challenges may also prevent regulators from identifying counterparty exposure and the build-up of risk in the financial system – critical components in obtaining a holistic view of the market.
With the finish line still a ways down the road, regulators are focusing attention on addressing data challenges. For example, outgoing Commissioner Scott O’Malia of the Commodity Futures Trading Commission (CFTC) recently cited data sharing and harmonization as a critical area of cross-border cooperation. To address this issue, he encouraged ongoing discussions regarding mutual recognition and global collaboration to harmonize both the form and format of data being reported.
U.S. regulators aren’t the only ones focusing on addressing data reporting and access issues. At a recent industry conference, the European Securities and Markets Authority (ESMA) highlighted that privacy laws and indemnification clauses already in place in several jurisdictions could restrict access to critical OTC derivatives transactions data held by U.S. SDRs. Fortunately, there is a bipartisan piece of legislation in the U.S. Congress (H.R. 742) that would address this issue and eliminate the need for U.S.-based SDRs to obtain indemnification agreements from foreign regulators prior to sharing critical data. H.R. 742 passed the House of Representatives in a 420-2 vote and the text of this technical fix was also included in the recently approved Customer Protection and End-User Relief Act (H.R. 4413).
In the race for financial reform, global efforts to enhance market transparency and mitigate systemic risk require global coordination. However, as the past four years demonstrate, this is a regulatory marathon, not a sprint to the finish line. It will take time to effectively and efficiently implement the financial reforms envisioned by the Dodd-Frank Act.
This article first appeared on the Tabb Forum website on July 24, 2014