Data Gap May Hide Derivative Risks

Shortfalls may undermine effort to use trade repositories to improve oversight, report says.

Regulators said they might not have enough information to assess the threat over-the-counter derivatives pose to the financial system.

Shortfalls in available data may undermine attempts to use so-called trade repositories as a tool to improve market oversight, the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions said in a report published today.

The lack of details on the value of trades “presents a potential gap in the data that authorities may require to fulfill” their mandates, the organizations said. More data on collateral would allow regulators to “better assess exposures, counterparty risk and ultimately systemic risk,” they said.

Regulators from the Group of 20 countries have sought to toughen rules on OTC derivatives such as credit-default swaps after the failure in September 2008 of Lehman Brothers Holdings Inc. and the rescue of American International Group Inc., two of the largest CDS traders. The value of outstanding OTC derivatives was about $601 trillion at the end of last year, according to the Bank for International Settlements.

Market Monitoring
The G-20 said in September 2009 that transactions involving standardized OTC derivatives should pass through clearinghouses and be logged in trade repositories, on the basis this would make the global financial system more stable and improve regulators’ ability to monitor what is taking place on the markets.

Examples of trade repositories include the New-York based Trade Information Warehouse, run by the Depository Trust & Clearing Corp., and TriOptima AB’s Global OTC Derivatives Interest Rate Trade Reporting Repository.

Alternative sources of information for regulators may need to be proposed if ways can’t be found to expand the role of trade repositories, according to the report. Two options include requiring more information from clearinghouses or banks.

The U.S. Commodity Futures Trading Commission this month adopted rules requiring companies at the center of the OTC derivatives market to use trade repositories. The CFTC altered an earlier version of the data rule, originally proposed in November, to ease information-sharing with overseas regulators, according to an agency summary.

 

Final Version
Under the final version, foreign regulators wouldn’t need to indemnify swap-data repositories or U.S. regulators for litigation costs if databases are registered with U.S. and overseas regulators.

Regulators and the financial industry should work together to harmonize the codes used by clearinghouses, exchanges and trade repositories to identify different companies, the organizations said today.

Such so-called standard legal entity identifiers would “aid regulators and industry in monitoring systemic risk,” the Global Financial Markets Association said last month. Lenders will work on a “globally viable solution that will be available to regulators around the world,” the GFMA, which brings together regional financial trade associations, said.

Banks and other firms active in trading OTC derivatives should develop a “standard classification system” for the securities, the CPSS and IOSCO said.

Madrid-based IOSCO brings together national market regulators from over 100 countries to coordinate rules and share information. The CPSS, which is part of the Basel, Switzerland- based Bank of International Settlements, is made up of central bankers from developed and emerging economies and sets standards for payment, clearing and settlement systems.



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