Since the 2009 Group of 20 (G-20) Pittsburgh Summit, the over-the-counter (OTC) derivatives market has undergone a dramatic transformation, with trade repositories now operational in all major derivatives markets. However, progress on global derivatives reform stands at a critical junction — while macroprudential regulators now have access to more derivatives data than ever before, they are challenged to turn this information into actionable intelligence to effectively assess and mitigate systemic risk.
The G-20 goal of enhanced transparency remains only partly addressed due to three key obstacles: The emergence of regional trade reporting regimes, a lack of global data standards and legal barriers that limit data sharing among regulators.
First, while trade repositories are heralded as an essential pillar of systemic risk management, the reporting regimes that emerged following the financial crisis were developed along regional lines. As a result, market participants face a fragmented and inconsistent set of reporting requirements. With trading activity being reported differently based on jurisdiction, regulators are unable to aggregate information to gain a holistic view of market activity, which hinders their ability to monitor the build-up of risk across the financial system. This fragmented landscape is preventing trade repositories from reaching their full potential as tools for systemic risk oversight.
Second, despite the implementation of derivatives reporting rules across most major jurisdictions, common data standards are lacking. Global standards are necessary as they provide a means of transforming data into information that can be used to help identify and mitigate risk. For example, legal entity identifiers (LEI) allow for the unique identification of legally distinct entities that are counterparties on financial transactions. While authorities have taken incremental steps on a market-by-market basis, global LEI adoption would serve as a significant step toward increasing transparency and, therefore, mitigating risk.
Standards could also be improved at the trade repository level by creating a common data vocabulary across repositories, such as those spearheaded by the Committee on Payments and Market Infrastructures (CPMI) and International Organization of Securities Commissions (IOSCO) Harmonization Working Group. Without a common language with which to communicate, trade repositories are unable to share and aggregate data on a global scale. To resolve this, regulators need to define and come to agreement on the specific data set required for systemic risk identification, and then implement consistent reporting standards across jurisdictions in order to fully capitalize on the benefits of the data being collected.
Third, while data standardization is essential, it will have limited impact if the barriers that hinder cross-border data sharing are not addressed. Significant legal barriers must be removed before data can be aggregated at a cross-border level and used by relevant regulatory authorities. For example, the U.S. Dodd-Frank Act requires swap data repositories to obtain indemnification agreements before sharing information with regulatory authorities, a requirement which has proved unworkable. These provisions limit access to and sharing of data among U.S. authorities and regulators globally, and pose a significant obstacle to the ability of regulators around the world to take advantage of the transparency offered by trade repositories. The U.S. regulatory community and Congress have recognized the need to address this issue and are making progress on a legislative solution.
While market infrastructures such as Depository Trust & Clearing Corporation (DTCC) stand ready to help address challenges to achieving the G-20 transparency goals, the right forum for this dialogue to advance is among global regulatory bodies, such as CPMI-IOSCO. As we approach the seven-year anniversary of the financial crisis, policymakers in all parts of the world must act with increased urgency to enact global data standards and develop appropriate governance frameworks that enable cross-border access to timely, accurate data.
Unless action is taken quickly, the important goals established by the G-20 commitments may never be fully realized.
This article first appeared in The Hill on July 30.