Donald F. Donahue, DTCC chairman and CEO, called continued cooperation between global regulators and market participants essential to enhancing transparency in the over-the-counter (OTC) derivatives market.
by Craig Donner
In testimony before the House Financial Services Committee on February 15, Donahue said that the high level of transparency envisioned by Dodd-Frank could be achieved across the entire derivatives market within six to nine months after the final regulations are implemented. However, Donahue stressed that the key to meeting this timeframe is ensuring a high level of cooperation between global regulators and market participants, as well as the continued use of proven, non-commercial infrastructure that distinguishes the function of swap data repositories (SDRs) from commercial considerations and jurisdictional squabbles.
"It is our sense, as a usergoverned and regulated utility servicing most of the major regulators worldwide, that the market participants and regulators globally are poised to undertake the significant cooperative effort necessary to provide complete transparency to these markets as contemplated by the Dodd- Frank Act," Donahue said. "It is our strong belief that while many of the regulatory aspects of the Dodd-Frank Act remain in development, transparency is a policy option that is most ripe for implementation."
Transparency mitigates risk
In his testimony, Donahue stressed that transparency is key to mitigating systemic risk – and that providing transparency requires a cooperative effort between global regulators and market participants. As an example, Donahue cited the cooperation between regulators and the industry in the wake of the financial crisis to enhance transparency in the credit default swaps (CDS) market by leveraging DTCC's Trade Information Warehouse (TIW).
The TIW is a centralized, comprehensive global electronic database containing detailed trade information for the market. The TIW database currently represents about 98% of all credit derivative transactions in the global marketplace, constituting approximately 2.3 million contracts with a gross notional value of $29 trillion.
DTCC leverages the TIW to publish comprehensive market-wide CDS information free of charge to the general public and provides comprehensive standard position risk reports to appropriate authorities worldwide (as well as responding to over 100 ad hoc requests from such authorities). In addition, DTCC has inaugurated an online portal for regulators to securely and directly access detailed data from the TIW's global data set. At present, 20 different regulators worldwide have linked to this portal.
Global regulatory cooperation
"Had the TIW's information been as comprehensive in the run-up to 2008 as it is now, much of the exposure uncertainty that contributed to market instability at the time, at least in the CDS market, could have been mitigated," Donahue said.
Donahue noted that the TIW's success in enhancing transparency in the CDS market was attributable to the substantial degree of global regulatory cooperation achieved through the Over-the-Counter Derivatives Regulators Forum and the OTC Derivatives Regulators Supervisors Group. Another factor was DTCC's role as a non-commercial entity with no motivation for holding the data other than to help both the regulators and market participants by providing a central place for data to be reported and for regulators to access it for both market surveillance and risk surveillance purposes.
'Remove commercial concerns'
"It was critical to the success of this process to remove commercial concerns from what is and should remain primarily a regulatory and supervisory support function," Donahue said. "As a true industry-governed utility, with both buyside and sellside firms, not to mention self-regulatory organizations, as stakeholders, DTCC has so far been able to secure the cooperation of virtually all market participants and all clearers and trading platforms with any significant volume. The challenge going forward is to bring similar regulatory and public transparency to other parts of the swap markets."
Donahue warned that if regulatory cooperation or the cooperation of market participants fails, data would be fragmented, inevitably leading to misleading reporting of exposures and a very expensive "fix" for the regulators and the marketplace generally.
"Fragmentation of data will leave the task to regulators of rebuilding in multiple instances the complex data aggregation and reporting mechanisms that have already been created," Donahue said. "That task was one of the primary reasons that the industry and regulators themselves created a single place for the data within DTCC." @