CAPCO on trade repositories: full of unintended consequences

An October 2, 2012 article on the CAPCO web site caught our eye. Entitled “Trade repository reporting: The regulation of unintended consequences” by Tom Riesack, the post looked at the complexities just under the surface of trade repositories. While the article was directed at swaps data reporting, it applies to lots of other OTC trading – including repo — where reporting is on the horizon.

The existence of multiple repositories, within and across jurisdictions, creates the obvious problem of which to send data to? But the issue is made more complex by the need to coordinate with one’s counterparties. What if you report to one repository, but your trading partner sends data to another?

The report noted, “… ESMA asks in its current proposal that collateral which is held/posted against each individual trade is reported. This is tricky if you have netting agreements in place where there is an exchange of collateral based on the overall portfolio with a counterparty…” Having the collateral included is a good idea, but that could get out of control in a flash. We wrote about this in a post on the ECB proposing to set up a repo trade repository. We said in that post “…Databases ought to include identifiers that indicate the type of collateral being dealt and what haircuts are used. Ideally exposure numbers should be included too although the IT trail that leaves makes our head spin…”

Tangentially, allocating collateral when it is part of a netting pool will be one of the major challenges of the next couple years. Netting is the holy grail of collateral management and creates great efficiencies. But it also causes extraordinary complexity. Who gets what in the case of liquidation, especially when the netting goes across separate collateral pools, will be a nightmare.

CAPCO said that many institutions don’t have the infrastructure to capture and report trades on a real time basis. There is clearly an IT opportunity there. Finally, the need for broadly accepted Legal Entity Identifiers (LEI) as well as Unique Transaction Identifiers or Unique Swap Identifiers (UTI or USI) will have to be in place to avoid the whole thing being a Tower of Babel.

A link to the CAPCO post is here.

A link to the Securities Finance Monitor post on the ECB proposing a repo trade repository is here.