by Roland Kielman
As the clock ticks towards mandatory industry compliance with new Dodd-Frank over-the-counter (OTC) derivatives rules, DTCC is getting the message out that it is fully prepared to comply with the Act’s robust swap data reporting requirements, which take effect October 12, 2012.
“DTCC will be ready on day one to meet the new reporting requirements,” said Larry Thompson, DTCC Managing Director and General Counsel, during testimony before the Senate Committee on Agriculture, Nutrition and Forestry. “Over the past two years, DTCC has made substantial investments to design, develop and implement systems to support swap data reporting for all five OTC derivative asset classes. This infrastructure has been designed with maximum flexibility so that it can evolve over time to meet the changing needs of regulators and market participants. Regulators can leverage these resources in their efforts to enhance market transparency and ensure a safe and sound financial system.”
Ready for October
The Dodd-Frank Act requires that all swaps, whether cleared or uncleared, be reported to a registered swap data repository (SDR), or trade repository as they are known outside the U.S. SDRs are required to be registered with the Commodity Futures Trading Commission (CFTC) for the interest rate and credit swap asset classes by October 12 – the same deadline for industry compliance with new recordkeeping and reporting requirements for these asset classes.
During the hearing, called Dodd-Frank Wall Street Reform and Consumer Protection Act: 2 Years Later, Thompson told the Committee that two DTCC subsidiaries have already applied for registration with the CFTC to operate as SDRs for all OTC derivatives asset classes – credit, interest rate, commodity, equity and foreign exchange.
“These new SDRs will be operational for interest rate and credit swaps in advance of the mid-October reporting deadline and have already completed back-loading a significant share of the historical swaps data, which is just as vital for regulatory oversight purposes,” Thompson said. “We have every expectation that the SDR system DTCC and others are developing will help provide regulators the infor-mation they need to manage systemic risk and provide market oversight.”
Track record on transparency
DTCC’s ability to provide transparency into OTC derivatives markets predates the adoption of Dodd-Frank and reflects extensive experience operating the centralized, comprehensive global electronic data repository for the credit default swap (CDS) market, which holds detailed trade information on more than 98% of all CDS transactions globally.
DTCC publishes comprehensive global market information weekly. This data is made available at no cost to regulators and the public on the company’s website (www.dtcc.com). DTCC also launched a Regulatory Portal in January 2011 to give regulators efficient access to more granular data. Today, more than 40 regulators worldwide are accessing the portal, including U.S., European and Asian authorities.
“Against the backdrop of the sovereign debt crises, corporate failures, credit downgrades and significant losses by financial institutions as a result of OTC derivatives transactions, data trans-parency in the CDS market achieved through voluntary industry reporting has helped to ensure market stability during times of volatility and given supervisors and the public the ability to more fully understand risk concentrations and levels of exposure,” Thompson said.
As an example, Thompson pointed to the recent restructuring of Greek govern-ment debt. “Despite widespread concern, it did not trigger extreme volatility in the markets as the restructuring might have in the past because regulators and the public had access to reliable and comprehensive information regarding the extent of market exposure to Greek debt,” Thompson explained. “This experience, along with several other similar incidents, illustrates the value of SDRs for regulatory oversight, systemic risk identification and mitigation, and increased transparency for market participants.”
Thompson also suggested that while transparency represents an important first step in giving regulators tools to better understand systemic risk and more effectively perform market oversight, the next step involves regulators acquiring the analytical tools to red-flag excessive risk-taking so they can take action quickly to prevent or mitigate systemic shocks to the financial system.
“Regulators must have the appropriate tools to analyze the data for both systemic risk oversight purposes and to identify potential abusive or manipulative market behavior,” Thompson said. “Having the raw data is important, but unless regulators are equipped with the necessary resources to understand and analyze the data, the full benefits of reporting swap transactions will not be realized. It is critical, for reasons of both time and money, that regulators leverage the capabilities of existing infrastructures to develop the necessary tools needed to identify certain risky behaviors on an automated basis.”
Thompson also urged regulators to implement new reporting mandates that ensure the continued aggregation of swaps data. DTCC has raised concerns over the indemnification provisions of Dodd-Frank, which could fragment the global data set for OTC derivatives and undermine efforts to increase market transparency.
In addition, Thompson noted that the public sector is not currently in the position to allocate scarce resources and the extensive time needed to develop data collection and reference data efforts, like the legal entity identifier initiative. DTCC has suggested that the industry shoulder these costs in order to free up the public sector to make investments in developing critical analytical tools and perform required oversight. @