DTCC Connection

Jun 03, 2013 • DTCC Connection

DTCC In Print: Thought Leadership for the Industry

One way DTCC provides thought leadership for the financial services industry is by writing and publishing articles in influential journals and publications. Here is a summary of the latest articles written by DTCC executives.

Larry Thompson, DTCC Managing Director and General Counsel, recently testified before Congress in support of H.R. 742. In his post on The Hill’s Congress Blog – Implementing the Vision of Financial Reform – Thompson explained the unintended consequences of indemnification and how H.R. 742 would ensure that regulators continue to have access to a global set of OTC derivatives data – an essential component of systemic risk oversight and mitigation. Here is a summary of the article.

The Dodd-Frank Wall Street Reform and Consumer Protection Act was created to help ensure market transparency and risk mitigation within the financial industry. No section of Dodd-Frank has received greater scrutiny than Title VII, which establishes a regulatory framework for the over-the-counter (OTC) derivatives market. Title VII includes provisions that threaten the high level of transparency and global data sharing envisioned by Dodd-Frank.

Under current law, derivatives clearing organizations (DCOs) and swap data repositories (SDRs) must report information about swap transactions to the Commodity Futures Trading Commission (CFTC), or, in the case of SDRs that receive information about securities-based swaps, to the Securities and Exchange Commission (SEC). Such information also must be shared with other regulatory agencies, both foreign and domestic, if those agencies request the information and agree to certain conditions.

The Swap Data Repository and Clearinghouse Indemnification Correction Act of 2013 (H.R. 742) would eliminate the requirement that agencies requesting the information indemnify the SDRs and the CFTC (or the SEC for security-based swap information) for expenses that arise from litigation related to the shared information.

DTCC continues to build support for H.R. 742. The issue of indemnification is problematic because: 1) many foreign countries do not recognize indemnification as a legal concept; and 2) even in countries that do recognize indemnification, many foreign governments cannot or will not agree to indemnify foreign, private third parties such as U.S. registered SDRs — in much the same way that a U.S. regulator would be unwilling to indemnify a trade repository in another country.

To read the complete article, go to: http://www.dtcc.com/downloads/leadership/bylines/Implementing_Vision_Financial_Reform.pdf

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Ron Jordan, DTCC Managing Director and Chief Data Officer, highlights the importance of the adoption of a global standard to identify derivatives transactions and the reporting of these to trade repositories and LEIs in his article, Going Global: The Creation of a Universal LEI, published in International Securities Services Mag April 30, 2013. Here is a summary of the article.

The financial crisis of 2008 sparked a wave of regulatory reforms designed to increase the transparency and the resilience of the financial industry. To execute systemic risk analysis, regulators must be able to identify entities involved in financial transactions and the relationships and affiliations between various legal entities. Unique Legal Entity Identifiers (LEI) were created to ensure that entities involved in all reportable transactions are consistently identified.

The U.S. Commodity Futures Trading Commission (CFTC) was the first regulator to mandate the use of such an identifier in regulatory reporting and record keeping. The rule requires swap dealers and other major swap participants executing over-the-counter (OTC) derivatives trades to report those transactions that are subject to CFTC oversight to a trade repository, and to identify themselves, their counterparties and any underlying reference entities of the contracts, with standard identifiers. Since the CFTC required the use of identifiers prior to the availability of the global LEI, it has mandated the use of a CFTC Interim Counterparty Identifier (CICI), until the global LEI program is fully implemented. To enable the industry to comply with this requirement, the CFTC named DTCC and SWIFT as the solution providers for CICIs. CICIs will transition to LEIs when the global LEI system is defined based on principles established by the Financial Stability Board (FSB). To date, more than 70,000 corporate and financial entities have registered for CICIs from more than 100 jurisdictions.

In Europe, regulators have also recognized the importance of making identification of counterparties in trade reporting mandatory. The European Securities and Markets Authority (ESMA) have also recommended the use of the LEI, or an interim entity identifier, in its final report on draft technical standards for the European Market Infrastructure Regulation (EMIR).

To read the complete article, go to: http://www.iss-mag.com/forward-thinkers/going-global-the-creation-of-a-universal-lei

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In his article, “New Regulations Require Cleaner Data,” in the April 17, 2013 edition of Thomson Reuters Compliance Complete, Mark Davies, General Manager and Head of Avox, explains how the less-than-pristine quality of entity data that exists in the financial markets is causing both reputational and operational harm.

One of the repercussions of the new regulatory environment is a significantly broader interest in data, from the compliance and risk departments all the way to board level members and investors. Efforts by financial regulators and firms to monitor and mitigate risk have seeped into almost all areas of a firm’s operations, including the management and maintenance of data.

In the aftermath of the financial crisis, firms are scrutinizing their data, specifically in relation to that which firms hold about themselves and their counterparties or clients – known as business entity reference data which describes the legal structure of a firm or entity. A growing concern across the industry is the realization that all too often, business entity reference data is unclear, inaccurate and maintained using legacy processes – often manual – which cannot keep pace or satisfy the demands of today’s financial markets.

The good news is that new mechanisms are being developed to help monitor risk, and many institutions, particularly larger banks, have already begun the process of identifying quality issues within their data. However, full implementation of risk-monitoring mechanisms, such as LEI, remains a ways off. Further, many institutions have not begun the process of identifying data quality issues. For these firms, processes relating to business entity reference data require attention – sooner rather than later.

To read the complete article, go to: http://www.avox.info/pdfs/Avox_Thomson_Reuters_Compliance_Complete.pdf.

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