The FSB on Trade Repositories: Is it a Tower of Babel?

The Financial Stability Board (FSB) released “OTC Derivatives Market Reforms, Fourth Progress Report on Implementation” at the end of October. This report’s focus is on infrastructure readiness; specifically looking at central counterparties, clearing platforms and trade repositories. In this post, we’ll look at what the FSB had to say about trade repositories (TRs). Deadlines are looming.

Broadly speaking, the report is optimistic. “The development of market infrastructure does not appear to be an impediment to further progress in meeting the G20 commitments for OTC derivatives trading, central clearing, and reporting…” although they cautioned “Regulatory uncertainty remains the most significant impediment to further progress and to comprehensive use of market infrastructure. Jurisdictions should put in place their legislation and regulation promptly and in a form flexible enough to respond to cross-border consistency and other issues that may arise…” Looking at what is holding up the next push forward, “Infrastructure providers cite uncertainty over the future regulatory framework as inhibiting their ability to complete necessary changes…”

On trade repositories, the report said, “There are nine operating TRs (where operating means a TR is both accepting trade reporting and making data available to regulators). Six TRs are available to accept and report Interest Rate and Commodity derivatives; accept and report on Equity and Foreign Exchange derivatives; and four accept and report on Credit derivatives.”

But the ability to make sense of the data, especially across jurisdictions, is still a work in progress.  “…Further developing the use of TR data for regulatory and financial stability purposes may be limited by impediments to data aggregation. There is a risk that, absent additional efforts to coordinate use of compatible data formats necessary for reconciliation, data could remain fragmented within and across jurisdictions…” and “Many of the TRs surveyed stated that the data formats they use would not be compatible with those of other TRs for the purposes of data aggregation across TRs and reconciling any differences in reporting from different participants. Standardisation of reporting formats and common identifiers is seen by TRs as key to facilitating aggregation, but requires further development. Even those TRs that considered their own data formats to be compatible with the data formats used by other TRs anticipated difficulties in aggregating or reconciling data owing to legal obstacles such as confidentiality requirements and restrictions on disclosure to third parties…”

We have dubbed the data compatibility problem the “Tower of Babel” dilemma and wrote about it in a post on October 10th entitled “CAPCO on trade repositories: full of unintended consequences”. Implementation of CPSS-IOSCO initiatives on LEI’s and unique trade identifiers cannot come quickly enough. We also wrote about the data issue in a SFM post on September 24, 2012 “ECB to set up Repo Database: devil will be in the details”.

The information is flowing to TRs for OTC interest and credit derivatives with estimates around 90% of all contracts being reported. FX derivatives don’t look as strong with the FSB writing that only around 50% of trades hitting the TRs. Commodities and equity derivatives, apparently, are anyone’s guess. “The state of development is most advanced for those TRs that were developed first  – credit, interest rates and equities  – while TRs for foreign exchange and commodities are relatively less advanced…” and “However, significant data gaps remain concerning the extent of reporting and central clearing of products, in particular for the commodities, equities and foreign exchange asset classes…”

The report cited data that most G15 dealers will be ready to report trades to TRs by end-2012. The same cannot be said for smaller financials or non-financials. “One TR assessed that, in Europe, the vast majority of medium-sized financial entities and non-financial entities have not yet started developing projects to adapt their systems for trade reporting…” We have heard before that the state of readiness outside of the big dealers is uneven at best. The same is said about collateral management capabilities where the big players could afford to throw money at the problem, but smaller participants are waiting for regulatory clarity — but may run of of time in the process.

TRs look to be geo-centric with 2/3rds of those surveyed having operations in only a single jurisdiction and less than 1/3rd plan to expand their operations geographically.  Many TRs are reporting on markets dominated by local institutions, but there are notable exceptions. “…a EU based TR that currently accepts transaction data for all credit, equity and interest rates assets classes estimates that 86% of its 27,000 accounts are foreign, while another that currently accepts data for the commodities and energy asset class reports a global range of almost 350 participants including G15 dealers and other types of financial institutions…”

Less than half of the TRs surveyed currently collect data or provide services in relation to portfolio-level information. Most of the TRs surveyed do not currently store legal documents relating to reported contracts…” and the majority of the TRs surveyed indicated that they have no future plans to do so. If one critical use of a TR is to raise warning lights when large inter-connected exposures could create systemic risk, then it looks like there is work to do on portfolio aggregation. This goes double for cross-TR data analysis. From the report, “All TRs reported having or anticipating difficulties in aggregating or reconciling OTC derivatives transaction data across different TRs…” and “One TR expressed the view that without common reporting formats and data fields, reconciliation of data reported to different TRs would be difficult if not impossible…”

Establishing trade repositories feeds into the massive push toward improving market data. TRs can lever nicely off of CCPs, but need to include non-cleared OTC derivatives, too. While regulations are national affairs, we are not the first to note they demand an international overlay. TRs have developed in a mad rush toward transparency, seemingly before the data architects could agree on a universal framework. It may be the nature of things that only the second and third generation of TRs will get the data compatibility thing right. Let’s hope that we won’t need a financial crisis to figure that out.

A link to the FSB report is here.

A link to the CPSS-IOSCO report looking at LEI and trade identifiers is here.

A link to SFM’s October 10, 2012 post is here.

A link to SFM’s September 24, 2012 post is here.

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