by Craig Donner
DTCC again turned to the blogosphere to begin a dialogue on the most effective way to sequence the implementation of new rules impacting over-the-counter (OTC) derivatives.
In an op-ed article on The Hill’s Congress Blog, Larry Thompson, DTCC general counsel, offered a strategy for phasing in the regulations to ensure they have the least impact on the efficient operation of the market.
“Based on our experience, we believe the new OTC derivatives rules should be implemented in three phases, beginning with establishing the necessary infrastructure to support the new regulatory regime,” Thompson wrote. “Phase 1 would require comprehensive trade reporting to swap data repositories (SDRs) to bring transparency to the market. After that would be mandatory clearing of OTC derivatives trades and then mandatory trade execution on exchanges or swap execution facilities (SEFs).”
Trade reporting is the critical first step, Thompson explained, because regulators will depend on current and accurate trade information to make decisions related to other parts of Dodd-Frank, including clearing and trade execution.
“Within each of these phases, it makes sense to sequence the implementation by asset class, focusing first on the products with the greatest automation because they will be the most capable of providing the highest quality data to SDRs,” Thompson said. “Under this scenario, credit and interest rate derivatives should be at the front of the line because the overwhelming majority of trades in these markets are already confirmed electronically. Next would be FX [foreign exchange] derivatives, and then equity and commodity derivatives together.”
Thompson also said the rules must make the twin principles of open access and user choice explicit while preventing trading platforms and SDRs from imposing artificial barriers to access or anticompetitive burdens on the trading, clearing or reporting of transactions. In addition, reporting counterparties should have the right to dictate where their transaction data is reported and vertical bundling and cross-subsidization of services should be explicitly disallowed.
services should be explicitly disallowed. “These policies will ensure that SDRs are able to fulfill their mission of providing record-keeping services for the benefit of regulators and the general public,” Thompson wrote. “As regulators begin the transition from writing rules to implementing them, we believe that appropriate sequencing will help promote more transparent markets for global regulatory oversight and systemic risk mitigation. We also believe that it will help protect the public and ensure liquid and efficient capital markets.”
About the blog
The Hill’s Congress Blog is a popular forum for congressional lawmakers and policymakers to share ideas and offer opinions on a wide range of public policy issues. Thompson’s op-ed quickly generated a high level of attention and was ranked as the most emailed article on the site within a day of its publication.