The Financial Stability Board (FSB) published “OTC Derivatives Market Reforms, Ninth Progress Report on Implementation” on July 24th. We take a look at what they had to say about trade repositories.
Trade repositories (TRs) are a fairly straightforward concept, but it is what happens next that tends to get complicated. The FSB report has a positive story on trade repositories for derivatives:
“…At end-June 2015, the majority of FSB member jurisdictions (14) have trade reporting requirements in force covering over 90% of OTC derivatives transactions in their jurisdictions. Further roll-out of trade reporting requirements is expected to continue over the course of 2015 and into 2016. In 2015, authorities anticipate expanding the reporting requirements in their respective jurisdictions by capturing transactions involving a wider range of products and/or market participants. By end 2016, almost all FSB member jurisdictions expect to have rules in place covering over 90% of the OTC derivatives transactions in their markets…”
But having requirements is different from successful implementation.
“…Authorities continue to note a range of implementation issues, though international workstreams that aim to address most of these issues are underway, including: steps to harmonise transaction reporting and to agree to a framework for uniform trade and product identifiers…”
There are 20 TRs authorized and reporting in 12 FSB member jurisdictions, according to the report. Three or more TRs for each assets class are operating in the US and EU, one or two per asset class are typically available in other jurisdictions.
There are a couple exceptions:
“Although a TR has been authorised in Turkey, it is not yet accepting transaction reports, while South Africa and Switzerland currently do not have any TR or TR-like entity authorised to accept reports in any asset classes within their jurisdiction…”
Most trades are covered, although patchy in places:
“…a substantial share of new OTC derivatives transactions is covered by reporting requirements in many jurisdictions…In most FSB member jurisdictions, an estimated 80–100% of all new interest rate and FX derivatives transactions are covered by reporting requirements. Reporting coverage for credit and equity derivatives transactions is uneven, though it is high in jurisdictions with the globally largest markets in these products (namely, the EU and US) as well as some smaller markets. Reporting coverage of commodity derivatives is more variable relative to other asset classes…”
So how well is everything working? There are some issues noted in the report:
• difficulties with TR data quality, such as the accuracy of information being received and processed by TRs, particularly associated with the absence of Unique Transaction Identifiers (UTI) and Unique Product Identifiers (UPI);
• challenges in aggregating data across TRs (both domestically and cross-border)
• the existence in some circumstances of legal barriers to reporting complete data into a TR (“input barriers”) (e.g. counterparty identity or other identifying data); and
• legal barriers to authorities’ access to TR-held data (“output barriers”)
A peer review was launched by the FSB in late 2014 to look at cross-jurisdictional reporting, usability of data, legal input or output barriers and best practices. Expect to see the results on October 2015.
Part and parcel with trade repositories are legal entity identifiers. If one ultimate objective is to access risk in the system and interdependencies, there needs to be a way to understand who owns the risk. The same goes for product and transaction identifiers. What good is it if one side of a trade calls it X and the other side calls is Y? This is critical not only within markets, but across jurisdictions too. International harmonization is the name of the game here.
Not a lot was mentioned in the report about what regulators intended to do with the data once they have it. As we have said before, this is the land of big data. Understanding which products can be substitutes for another (for example, repo and total return swaps) will require more than just collecting the data.
The Total Return Swap data needs to be collected as it is a growing way in which balance sheets are again being “managed” and could perhaps lead to additional problems ala Lehman. The OFR is deemed to be the collector of data but are TRS trades is within their scope?