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DTCC Faces European-based Threat to Trade Repository Plans from BME

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The Depository Trust & Clearing Corporation (DTCC) has been pitching its Trade Information Warehouse as a repository for OTC derivatives trade data for some time, but it seems the vendor will soon be facing some competition from Spanish stock exchange operator Bolsas y Mercados Españoles (BME). The regulatory community is keen to get deeper into the data details of the OTC derivatives market and hopes to increase transparency by mandating the use of trade repositories.

The DTCC has understandably been actively pitching its Trade Information Warehouse as a candidate for the role of a single global repository for this data. However, as with most efforts in the space (see the central clearing counterparties for derivatives, for instance), the European market is likely to launch its own repository. This puts BME’s planned Madrid-based trade repository, which it hopes to have in operation in the second quarter of next year, firmly in the running as a European candidate.

The launch is in line with the European Commission’s Communication of 20 October around the establishment of a repository for derivatives trade data. The Commission, much like its Securities and Exchange Commission (SEC) counterpart in the US, is aiming to achieve greater operational control and transparency in the trading of these products.

According to the European Commission the appropriate management of systemic risk requires supervisory authorities to have a thorough vision of OTC derivatives markets and this can only be attained if all trades are reported to a trade repository, which in turn makes the information available to the supervisory authorities. Last month, the Committee of European Securities Regulators (CESR) released a new consultation paper examining the need for a repository. By placing this data into a centralised registry that maintains an authoritative electronic database of all open OTC derivative transactions, CESR and the Commission hope to gain a better handle on the flows and risk exposures within the market.

In this scenario, BME claims that it is very important that the trade repositories are managed in an independent, professional and efficient manner in such a way that they fulfil their main function without the limitations that arise from conflicts of interests of those who still prefer to keep the markets opaque. BME contends that its trade repository will have the capacity to “respond satisfactorily to the demands brought about by the current situation”.

The new service will initially be provided in Spain but this will eventually be extended internationally, says BME. “The system can in the future be shared with other markets or implemented by BME in other countries,” the market operator said in a statement. The trade repository will encompass a broad scope of financial instruments, among them bilateral securities lending, bank loans or credit claims as well as OTC derivatives whose underlying assets are fixed income, equities, currencies or commodities.

In order to function effectively, however, the repository will likely require new regulation to be introduced at a European level and filtered down into each country’s legislation, as noted by CESR in its paper. Given the market’s reticence with regards to facing yet more regulatory compulsion this will likely prove unpopular.

Moreover, the regulatory community may be keen for greater transparency around OTC derivatives data, but the market is concerned about regulators going a step too far. The International Swaps and Derivatives Association (ISDA), the Securities Industry and Financial Markets Association (Sifma), and the London Investment Banking Association (Liba) have already published a joint response to the European Commission’s CCP proposals, warning that derivatives standardisation should be balanced by market innovation.

Industry participants are wary of the use of centralised data repositories for these instruments because they feel this may hamper attempts to innovate in the market. The statement warns that it is “critical that their usage does not curtail the flow of new products to the market and fully respects the global basis on which these products trade”.

Data standardisation in the derivatives market is certainly on the cards, regardless of where such a repository is based and how much concern the industry displays. Regulators will not likely be dissuaded from setting up entities such as this to gain more insight into market practices.

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