More ideas on OTC trade repositories from the Financial Stability Board

The trade repository conversation continues to gather steam, this time with a draft proposal from the Financial Stability Board on OTC trade repositories (TR). The FSB doc contains more specifics on how these TRs could be organized and actually work in practice. It’s no small task.

The FSB consultation paper, “Feasibility study on approaches to aggregate OTC derivatives data,” comes hot on the heels of the European Commission’s ideas for a trade repository in securities lending and repo (discussed by us here). A compare-and-contrast between the EC and FSB documents is worth while. In the EC’s version, we pointed out that “first, the Commission suggests that the creation of a central repository may be best carried out by institutions or service providers that are already in this space. Second, the proposal does not suggest that there should be one securities repository.”

Both the EC’s TR proposals for seclending and repo and the FSB’s TR consultation on OTC derivatives have more or less the same objectives. The FSB says regulators will want:

1. Transaction-level (data specific to uniquely identified market participants and transactions)
2. Position-level (gross or netted open positions specific to a uniquely identified participant or pair of participants)
3. Aggregate-level (summed data according to various categories, e.g. by product, maturity, currency, geographical region, type of counterparty, underlier, that are not specific to any uniquely identifiable participant or transaction)
• according to a certain level of breadth (in terms of scope of participants and products/underliers)
• and according to a certain level of identity (named versus anonymous).

The FSB looks at three different approaches to a TR: “a physically centralised model; a logically centralised model; and the collection and aggregation by authorities themselves of raw data from TRs.” The physical model is the easiest to see working in practice – one data repository, one standardized data cleaning methodology, one data source to draw on and one set of final analytics.

The second option gives more flexibility to market participants but more complication in the final organization. It also requires some sort of intermediate data collection step between the different TRs and government regulators, otherwise individual analytics from the different TRs would not add much value. The third option is that regulators themselves become the TRs. We are not optimistic about the prospects for a speedy implementation for the third option (that’s a nice way of saying what a mess this could turn into).

We see the biggest problem for any of these TRs as the global nature of financial markets. The FSB recognizes that regulators need the right to look into each others’ TRs, but regulators are going to have a hard time in the current broken down regulatory model. As the FSB notes, ” One challenge is how an authority can know which TR holds data relevant to its mandate, given the proliferation of TRs and the various reporting requirements in different jurisdictions.”

The only way we see to solve this problem is by implementing one global TR across multiple products. But as we all know, that’s not going to happen any time soon unless the IMF gets involved more seriously in these matters. While that is not a conversation for today, we do note that the IMF has been slowly moving towards a more central data collection role (see our article on the Top 50 Counterparties from January 2014). We would not be surprised to see more of this in the future. IOSCO’s proposal for one global regulator seems to be motionless for now.

Responses to the FSB consultation paper are welcome by February 28, 2014. We expect some interesting reading in the response letters.

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