Donald Donahue, chairman and CEO of the Depository Trust & Clearing Corporation (DTCC), today stressed that a single trade repository for OTC derivatives contracts is essential to mitigating risk and enhancing transparency in the market. Donahue made his remarks as part of his keynote address at a US Chamber of Commerce discussion titled “Modernising Derivatives Oversight: Developing Policy for the 21st Century.”
“DTCC strongly urges Congress and regulators to codify into law the continued operation of a central global repository for OTC credit derivatives,” Donahue said. “We believe that having all of this information residing in a single place is a crucial contribution to reducing risk and promoting market efficiency. When markets are in turmoil, it is critical that regulators have the ability to see the full details on the underlying trading positions of derivatives contracts from a central vantage point to quickly assess systemic risk across the financial system – and to bring greater transparency to the market. This snapshot of the market can only be provided by a single global repository.”
DTCC operates the Trade Information Warehouse – the only comprehensive repository and post-trade processing infrastructure for OTC credit derivatives in the world. The warehouse handles the calculation, netting, and central settlement of payment obligations between counterparties, and automates the processing of “credit events” – situations where the protection against default provided by a credit default swap is activated.
In addition, DTCC’s Deriv/SERV matching engine, which electronically captures, confirms and matches over 95% of all credit derivatives traded globally, supplies the warehouse with more than 41,000 transaction sides daily. The warehouse connects and services over 1,400 global dealers, asset managers, and other market participants in 35 countries. The trade repository was also designed to be extended to other OTC derivative asset classes. DTCC has publicly stated that it will support all efforts to create CCP services planned in the US and overseas, on a non-discriminatory basis.
“We believe that when central counterparties (CCPs) and a global repository work in tandem to support each other’s functions, risk can be significantly mitigated, and transparency enhanced in the marketplace,” Donahue said. “This powerful combination is what is needed to ensure the business community has the necessary risk benefits and financing flexibility, and our policy makers have the assurance that the integrity of the financial system will be maintained.
“If we consider that globally there are about six CCPs planned to be launched either in Europe or in the US, we can recognise the potential for fragmentation of data about the market, if there’s no central repository storing all the data in one place,” Donahue said. “If we recognise that these CCPs will only clear a portion of the market, the need for a central repository is further emphasised.”
Since last year, DTCC has seamlessly processed, or is processing through the warehouse, more than 40 credit events, including the Lehman Brothers and Washington Mutual bankruptcies as well as the conservatorships for Freddie Mac and Fannie Mae. Because the industry had in place a robust, centralised infrastructure for the CDS market in the wake of last year’s financial turmoil, market participants were able to manage the multiple processing and operational challenges they faced with a greater degree of certainty and efficiency.
DTCC has been working closely with market participants and regulators to achieve that vision. Since November 2008, DTCC has been publishing weekly on its website, key statistics and data from the Warehouse on the size and turnover of the CDS market.
Following the Lehman bankruptcy last year, DTCC played a significant role in unwinding over US$500 billion in open trading positions from trades in equities, mortgage-backed and US government securities, without any loss to the industry — and avoiding additional burden on taxpayers.