At the Office of Financial Research and Financial Stability Oversight Council conference “Assessing Financial Intermediation and Analysis” held December 6, 2012 there was a lot to take in. One of the themes we heard repeatedly was about micro efforts to solve macro issues. Our question is: how will it work?
Trade repositories (TR) are the classic example of doing small things in order to address the bigger picture. Looking specifically at repo and TRs, Susan McLaughlin from the Federal Reserve Bank of New York said that trade repositories can surmount the “fragmentation of the landscape” and that design is critical. They plan to start with surveys of the market to learn about what kind of data will be useful and how to collect it. But to us the really interesting part was when she said that collecting data from centralized trading venues (eg. CCPs and central tri-party clearing banks) is much less complex than in a bilateral marketplace. Reformers of the swaps market have made the connection between bilateral trades and systemic risk & opaque markets. If repo is no different, can a regulatory mandate move toward CCPs in repo be far behind?
Collecting all the information in trade repositories is a “devil is in the details” kind of enterprise. Trade repositories accumulate a treasure trove of trade-by-trade data, but it must be aggregated and analyzed at 10,000 feet to extract macro information. And by macro information we mean clues about systemic risk or bad behavior that is building up in the system. Think of it as seeing the forest through the trees. Up close you can only see the tree (read: your risk) in front of you and maybe the others in your immediate vicinity, but never the entire picture. Most of the debate we see is about the micro efforts — what information to collect, how to collect it, how many trade repositories will there be, who gets to see the data and when. But macro analysis is the ultimate goal. It is not easy and we expect regulators will be in a for a challenge.
Of course the first step is getting the micro stuff right.
The debate about how many trade repositories covering the same markets reminds us of the same discussions about CCPs. Too many CCPs and the risk mitigation benefits start to go away. Too many trade repositories and data ends up every which way. Are we already there? Brewing turf wars, like the one between the CME and DTCC over swap trade data, could derail data collection. We wrote about that in a post on Dec. 3rd “DTCC clashes with CME of CFTC data repository rules”. At the OFR/FSOC conference, a representation from DTCC brought this up in the Q&A and was very clear about how unhappy he was.
CCPs have not developed cross-border and may never. But trade repositories must if the data is to be captured accurately. Coordinating that kind of data collection is a gargantuan task. Double-counting could be managed by getting global trade identifiers and global transaction type identifiers spec’d out right and implemented…but it will take a level of coordination that we still only aspire to.
We applaud the Office of Financial Research and Financial Stability Oversight Council for putting together the conference and addressing so many critical issues. The debate on “how will it work” is just starting.
A link to the conference is here.
A link the the SFM post on Dec. 3rd is here.