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A Decade on From Financial Crisis the System is Safer Still Further to Go

By Mark Wetjen, DTCC Managing Director and Head of Global Policy | October 2, 2018

Turning User Feedback Into Improved Market Insights
Mark Wetjen, DTCC Managing Director and Head of Global Policy.

Ten years on from the start of the financial crisis it is a good time to evaluate the progress made with regard to strengthening the system and to assess whether the vulnerabilities exposed have now been addressed.

The communiqué that resulted from the 2009 G20 Pittsburgh Summit, which was established to discuss financial markets and the world economy following the crisis, was clear in its intentions regarding over-the-counter (OTC) derivatives. It prescribed a number of reforms with a view to creating greater transparency and offsetting systemic risk.

This included regulatory reporting of OTC derivatives transactions to trade repositories, greater central clearing of swaps contracts, higher capital requirements for non-centrally cleared derivatives and the trading of OTC derivatives on exchanges or trading platforms, where appropriate.


In many ways, trade reporting has been one of the successes of the post-crisis reforms. Domestic compliance with the G20 reporting mandate has been achieved and a wide range of reporting requirements has been fulfilled to enable transactions across OTC derivative asset classes to be reported in an accurate and timely fashion. Jurisdictions have, however, chosen different routes to implementation, and there are some important differences in the regulations themselves.

The result of this divergence has contributed to deficiencies in data quality and thus deficiencies in the view that regulators around the world have into the swaps marketplace. That said, international industry bodies are working tirelessly to implement worldwide standards and data harmonization in trade reporting.

The Financial Stability Board (FSB) is actively collaborating with the Committee on payments and Market Infrastructures and the board of the International Organization of Securities Commissions (CPMI-IOSCO) to formulate governance and technical guidance which drives common data standards for derivatives reporting.

Furthermore, standard-setting bodies (SSBs), trade associations, regulators, market participants and market infrastructures are all working together to agree technical guidelines to create greater data consistency.

These efforts have led to the establishment of guidelines for the consistent use of critical data elements (CDEs) required to identify, process and report OTC derivatives transactions. Unique product identifiers (UPIs), unique trade identifiers (UTIs) and legal entity identifiers (LEIs) are all examples of CDEs and form the basis for a concise and consistent data set critical for effective data aggregation.

Progress has been made from a legal and regulatory standpoint in the areas of data sharing and third-party access, two issues that also frustrated regulatory efforts to achieve a full view into the swaps marketplace. Back in December 2015, the U.S. Congress repealed statutory indemnification requirements that had previously limited data exchange with trade repositories from third-party jurisdictions.

Meanwhile, the European Commission (EC) in May 2017 proposed an amendment to the European Market Infrastructure Regulation (EMIR) to provide direct access to data held in European trade repositories for third-party facilities in jurisdictions with which equivalence has been agreed. In parallel, the FSB has been coordinating efforts to find appropriate ways to share data efficiently and cost effectively, without putting all the onus on trade repositories.

What has become clear since the mandating of trade reporting by the G20, is that a fully standardized international reporting framework will only be possible through increased and continuous coordination.

Recent progress by the FSB and CPMI-IOSCO on governance and technical standards are triggering policy decisions in significant jurisdictions that are anticipated to result in broader adoption of a common framework for derivatives trade reporting, especially in those jurisdictions that play host to significant swaps market activity.

This framework includes standardized reporting requirements, improved control for data quality, aligned formats, standard definitions, consistent values for data fields and internationally recognized identification standards.

International guidelines

United States

In the United States, the Commodity Futures Trading Commission (CFTC) incorporated CPMI-IOSCO guidelines in its recently released road map for additional swaps market reforms. To support future interoperability and aggregation, the road map's milestones were set to reflect the FSB's and CPMI-IOSCO's guidelines.


In Europe, the European Securities and Markets Authority (ESMA) published a report in July 2017 which referenced CPMIIOSCO's work on data harmonization and standardization, noting that European reporting requirements would require refinement to accommodate further developments of international standards.

Central clearing

Furthermore, the promotion of central clearing, a major component of the 2009 reforms, has substantially improved the transparency and risk management of OTC derivatives in the past decade. According to estimates by the Bank for International Settlements (BIS), approximately 55 percent of credit and 75 percent of interest rate derivatives were centrally cleared as of 2017 year-end, a significant improvement if compared to the pre-crisis landscape.

These advancements are driven by an increasing number of jurisdictions with regulatory frameworks that support central clearing of these products and the growing availability of CCPs that are authorized to clear specific OTC derivatives. As noted in DTCC's Systemic Risk white paper published on September 12, there may also be opportunities to strengthen financial stability still further by expanding the benefits of central clearing to specific areas within cash markets, including the $1.6 trillion institutional tri-party repo market; such efforts would further offset fire-sale risk.

The final element that requires urgent attention is equivalence determinations by the EC with regard to U.S. cash securities markets under the jurisdiction of the U.S. Securities and Exchange Commission (SEC) (derivatives markets have been addressed by the EC).

To remain competitive in serving clients, as well as managing internal treasury functions, EU firms and their clients increasingly require access to the international financial markets, including the equity and fixed-income markets in the United States.

This necessitates access to trading venues and post-trade infrastructure located outside of the EU. The uncertainty surrounding recognition of U.S. equity and fixed-income markets places EU banks and EU-domiciled clients in a less competitive position, and hampers liquidity in markets used for risk management and funding purposes.

Getting our Priorities Right

A decade on from the collapse of Lehman, significant progress has been made in addressing some of the major weaknesses in the financial system which surfaced during the crisis. The implementation of trade reporting has played an important role in

increasing transparency in the financial system, and in the quest to offset systemic risk.

Differences in regulatory requirements, variations in data scope and staggered implementation timelines, as well as a tendency to put local objectives before international aspirations to enhance transparency, all compromise regulators' ability to perform systemic risk analysis and impede the smooth functioning of markets.

If the G20 goals of greater transparency and mitigation of systemic risk are to be fully achieved, it will be essential to prioritize the objectives of data harmonization and the adoption of common standards.

Originally published by Thomson Reuters © Thomson Reuters.