Until now, the global reporting framework for over-the-counter (OTC) derivatives transactions prescribed in 2009 by the Group of 20 nations (G20) has fallen short of its potential partly due to the absence of globally harmonized data standards. But key regulators around the world are now mobilizing to enact industry-vetted data standards, with one of them -- the US Commodity Futures Trading Commission (CFTC) -- taking the first concrete step to do so. This activity is setting the industry on a path to realize the G20’s objective: a reporting system that enables regulators across jurisdictions to detect and mitigate systemic risk arising from derivatives trading. Periods of unusual market stress, like we are experiencing now, demonstrate the importance of continuing to advocate for greater data consistency so that the information can be easily accessed and evaluated by those tasked with protecting the financial markets.
In a proposed rule issued February 20, 2020, the CFTC laid out a plan to require reporting parties within its purview to utilize industry-recommended critical data elements (CDE) when submitting their OTC derivatives trade information. The CDE proposal was developed by the working group for the harmonization of key OTC derivatives data elements (Harmonization Group) of the International Organization of Securities Commissions (IOSCO) in partnership with the Bank for International Settlements’ (BIS) Committee on Payments and Market Infrastructures (CPMI).
By proposing the adoption and implementation of CDE, the CFTC is helping further global uptake of this approach. We expect Canadian financial regulators to adopt CDE for reporting as well. Use of CDE for recordkeeping and reporting also aligns with efforts to promote data harmonization in rulemaking, an objective of the CFTC as well as the US Securities and Exchange Commission (SEC). And the European Securities and Markets Authority (ESMA) stated in its 2020 Annual Work Program that it will consider implementing provisions on harmonization of OTC derivatives data elements developed by CPMI-IOSCO.
Where We Are: Vision vs. Reality
Leaders attending the G20 summit in Pittsburgh in 2009 recognized the need to reform the global derivatives market to mitigate systemic risk and guard against a repeat of the financial crisis. In response, they devised a blueprint for market changes that included reporting OTC derivatives contracts to trade repositories to increase market transparency for regulators. Shortly thereafter, the Financial Stability Board (FSB) committed to work with CPMI and IOSCO to develop international recommendations for OTC derivatives trade repositories.
Over the past decade the industry has implemented the major elements of this blueprint, including the establishment of trade repositories (TRs) for transaction reporting. However, a lack of global regulatory coordination has hindered the development of universal standards for the data that is reported. Furthermore, regulators devised their own data fields, terms and core elements, which prevents the effective sharing of data across jurisdictions, increases compliance costs, and obstructs the data aggregation that could give regulators the hoped-for global picture of derivatives-driven systemic risk.
In announcing the agency’s proposed rule on CDE, CFTC Chair Heath Tarbert said: "Harmonization would remove the burdens of duplicative reporting while painting a more complete picture of market risk. Our swaps markets are integrated and global; it is time for our reporting regime to catch up.”
Mobilizing for Reform
Industry bodies like IOSCO and CPMI, as well as DTCC, operator of the majority of TRs globally, have long advocated for global data harmonization as the means to realize the transparency and compliance-cost reductions that shared derivatives data can deliver to the market. As the FSB has noted, aggregating OTC derivatives trade information globally is also critical to effectively analyze systemic risk, given the high degree of cross-border trading of these instruments.
Starting in 2014, the Harmonization Group formed by IOSCO and CPMI worked on formulating standard definitions, formats and usage rules for CDE that are reported to TRs. In October 2019, the group issued its final report, which targets jurisdiction-level implementation of CDE across all jurisdictions within three years.
And now the CFTC has made the next move for CDE with its proposed rule. This proposal further adheres to CPMI-IOSCO guidance by putting forward a Unique Transaction Identifier (UTI) requirement to replace the existing Unique Swap Identifier (USI) system.
There are also promising signs of increased cooperation among regulators in Asia to align on standards. For example, the Monetary Authority of Singapore (MAS), referencing the CPMI-IOCSO technical standards as a driver, recently deferred implementation of their current UTI requirements with the express purpose of allowing adoption of a global standard.
To appreciate the criticality of bringing data elements across jurisdictions into harmony, it is useful to understand the complexity of OTC derivatives trade reporting. More than 100 data elements are typically reported to TRs for each transaction, but the same set of elements are not necessarily required from one regulator or jurisdiction to another, nor are formats for dates, currencies and other variables consistent among them.
Applying a specified meaning to a data term and employing a standard format and a pre-defined value to report it makes it possible for reported data to be aggregated across TRs and jurisdictions – and in turn for regulators to construct comprehensive pictures of potential systemic risk.
The universal use of standardized CDE will also benefit market participants, by reducing the operational burdens and lowering the costs of reporting derivatives transactions to multiple TRs in multiple jurisdictions. CDE homogeneity will be a welcome milestone as well for DTCC’s Global Trade Repository services (GTR) and other entities that operate TRs in more than one jurisdiction.
While the industry must still address other issues around reported data to achieve optimal harmonization, adoption of CPMI-IOSCO’s prescribed reporting standards by the CFTC and other regulators will significantly reinforce global collaboration in the derivatives industry, enabling TRs and regulators to fulfil the objectives set forth in the 2009 Pittsburgh Summit.