The global derivatives markets are set to hit a significant milestone. In October 2012 the Commodity Futures Trading Commission (CFTC) became the first regulator to go-live with requirements for the reporting of over the counter (OTC) derivatives to an authorized trade repository (TR), kicking off a regulatory cascade that continues to this day.
Related: How the CFTC Rewrite is Leading the Charge
Much has changed over the last decade, and Global Investor spoke with one of the firms at the epicentre of engineering that change to gauge lessons learned and the path forward ahead of the incoming wave of trade reporting Refits and Rewrites. Chris Childs, head of repository and derivatives services at DTCC commented:
“I don’t think there’s an organization that’s been more active in working groups and public forums to push harmonisation and standardisation of reporting rules,” Childs said. “At DTCC we believe that the industry can capture real value in terms of risk mitigation, efficiency and cost savings from standardisation across jurisdictions. We don’t expect that global requirements will ever be 100% aligned, but we believe the incoming rule changes represent significant progress.”
DTCC created its Trade Information Warehouse in 2006 with an initial focus on post-trade processing of credit default swap transactions. It subsequently gained the industry mandate (from trade bodies the International Swaps and Derivatives Association and the Association for Financial Markets in Europe) to be the preferred service provider for much of the OTC market in 2011.
Fast forward to today, and the firm estimates that its Global Trade Repository service (GTR) covers around 80% of OTC derivatives and 85% of securities financing transactions reported globally. DTCC operates locally registered or recognized TRs for cleared and uncleared derivatives across multiple asset classes, which puts it in pole position as the industry looks to meet the challenge of how best to process all this new information.
In January, the CFTC extended the compliance date for the first phase of its new data reporting rules (dubbed CFTC Rewrite) to December 5, but that deadline is only the first of many for international firms. The implementation of the second phase of the CFTC Rewrite rules is expected in late 2023, while the EU’s European Markets Infrastructure Regulation (EMIR) update, known as Refit, is expected to be phased in from as early as April 2024. That month could also see Australian, Japanese, Hong Kong and Singapore regulators’ versions of the rewrite rules, with the UK version of Refit set to be rolled out later that year.
These new rules shift regulatory regimes towards the harmonisation that was lacking ten years ago. Based on a recommendation from The Financial Stability Board (FSB), the International Organisation of Securities Commissions (IOSCO) and the Bank for International Settlements Committee on Payments and Market Infrastructures (CPMI) worked to extend international data standards beyond the existing requirements by some regulators for the reporting of legal identity identifiers (LEIs) and universal transaction identifiers (UTIs). In 2018 the CPMI-IOSCO Harmonization working group introduced a framework for OTC derivatives data standardisation, introducing a recommended set of critical data elements (CDE) including LEIs, along with universal product identifiers (UPIs) to be used as technical guidance for jurisdictional regulators. DTCC was involved in that effort, and believes the new regime represents a significant step forward.
“A crucial side effect from that previous lack of harmonization has been the inability to aggregate data from a global systemic risk perspective,” Childs said. “We were one of the early institutions that called for greater harmonization and contributed to the work of CPMI-IOSCO to try and remedy that at the time. The publication of the CDE and the subsequent implementation of the CPMI-IOSCO recommendations were the result of that process.”
“Jurisdictional differences persist, but with the introduction of UPIs and the ISO 20022 XML messaging schema and with the CDE being to a large extent consistently applied, there is now an opportunity to reuse code in a different way within the systems we have today. There is a real opportunity to harness technological advances and the progress being made towards harmonization to rethink the way this data can be used in the future.”
Once all the changes have come into force, DTCC analysis shows that 52 of the 110 critical data elements identified by CPMI-IOSCO will have been implemented consistently across jurisdictions, which is enough of a base for the industry to build a better overall picture of market risks.
“The analysis that we have done shows that those 52 data elements do contain enough information from an economic perspective to amalgamate and arrive at a reasonable systemic risk assessment,” Childs said. “So progress has been made, and technology has now improved to the point where it is possible to connect and share datasets, temporarily merge datasets, run analytics, and then afterwards expunge the data. Harnessing that technological advancement could allow for an assessment on exposures and the potential contagion impact after a market event, or pull data on particular trading counterparties or specific asset classes.”
Looking forward, DTCC sees an opportunity for efficient data sharing across TRs, but for that to happen a governance framework needs to be agreed between regulators.
“We are looking at data amalgamation technology proof of concepts internally while exploring how this technology could eventually be used across multiple TR datasets.” Childs said. “It does, however, raise all sorts of questions around governance, and under what sort of framework the regulators would allow this activity to operate. For example, you would potentially need formal data sharing agreements or other governance structures in place. To advance a co-ordinated regulatory framework in this space it is key that the industry understands and starts to address the issues associated with data sharing. Lack of such a framework will reduce the potential benefits of harmonised data rules.”
As a firm, DTCC has expanded and upgraded its trade reporting systems to meet the growing needs of clients, and its GTR, through locally registered or recognized TRs, supports the reporting of derivatives and securities financing transactions across 12 jurisdictions. In the current landscape, scope of coverage alone is not enough to grapple with the challenges of integrated and reliable trade reporting so the firm has looked to keep pace with the technological tailwinds in the market.
“In today’s global trade reporting landscape, enhanced flexibility is required to quickly respond to evolving regulatory mandates,” Childs said. “To meet the growing need for scalable, resilient and reliable trade reporting infrastructure we completed a multi-year re-architecture of our GTR platform. Leveraging the latest cloud technologies has allowed us to simplify our platform infrastructure and enabled it to function across jurisdictions and products while supporting regional nuances in reporting requirements.”
In 2017, the DTCC undertook a project to update the architecture of the GTR to leverage cloud technologies, simplifying and enabling the platform to function across jurisdictions and products while supporting regional nuances and differences in reporting requirements. The enhancement program was launched in Europe and Hong Kong in 2017, the Asia Pacific in 2018, the US and Canada in 2020, and in Japan last year.
“It was this modernized platform that allowed us to seamlessly extend our services to support the reporting of securities financing transactions, allowing clients to meet their SFTR obligations when the regulation came into force,” Childs said. “When Brexit came into effect, we split our repositories between Europe and the UK, allowing clients to meet their existing European Securities and Markets Authority and/or new Financial Conduct Authority reporting obligations.”
That longstanding expertise has grown alongside the expansion in the coverage and scope of the company’s services over that time, Childs says, as the firm has leveraged its experience and flexibility to enhance customer support services. In 2020 the firm launched DTCC Consulting Services, separate from their TRs, that offers impactful front-to-back consulting for firms looking to implement change strategies.
“Readiness for upcoming rules changes and the associated increased regulatory scrutiny, focus on accuracy and data quality are all clear and present pain points for our clients,” he said. “We introduced Consulting Services as a direct response to our clients’ needs as they prepare for the unprecedented volume and pace of regulatory change.”
“Our bespoke engagement model covers all steps of a client’s regulatory change program, starting with impact analysis all the way through to business requirement development and documentation, testing, control framework analysis and design, and finally post-implementation review. All of these offerings are supported by a team of DTCC subject matter experts with decades of collective post-trade experience.”
“We've developed best practices from our direct experience and we can assess an individual reporting entity's internal controls against that best-in-class control framework and identify gaps, and then discuss any remedial action to address those gaps,” Childs says.
As the regulatory landscape has evolved, industry demand for end-to-end trade reporting solutions has grown. To help meet this need, DTCC leveraged their extensive expertise to create a new cloud-hosted service, DTCC Report Hub®. Report Hub allows firms large and small, including banks, swap dealers, custodians, clearing houses and buy-side firms to manage pre and post trade reporting activities across 14 jurisdictions, has also seen a significant parallel growth in users. The service has signed up 85 firms, up from 70 at the beginning of July.
“The growth we have seen in use of Report Hub reflects the fact that firms are actively thinking about the right strategy to address the cost and complexity attached to these various regulatory updates,” Childs added. “When GTR and DTCC Report Hub are used together, clients can manage their derivatives and SFTR reporting obligations holistically, benefiting from a full suite of products that have been developed and updated in tandem with global regimes.
“It can be more efficient, and less costly to use a vendor than it is to do all the redevelopment yourself, but every firm will have to assess its own needs and strategy. Vendors will have different approaches, so if they go down to vendor selection route, firms will have to understand exactly what the capabilities are and the impact of different fee methodologies. DTCC Report Hub is a comprehensive pre and post reporting solution aimed at protecting clients against much of the cost of change.”
As firms look to prepare their systems for the most immediate challenges to their post-trade processes, the industry should also have one eye on the ultimate purpose of these changes – building capability that can quickly be deployed to accurately manage systemic risks and events.
“In the two years to 2024, the industry needs to think about a controlled and efficient application of regulatory change,” Childs said. “It is time to start thinking about that now because there is significant planning and execution that will have to take place. In parallel, it would be good for the industry to start taking steps to address the challenges of data amalgamation and learn the lessons of the past.”
This article originally appeared in Global Investor Summer 2022 Magazine on August 4, 2022.