The Depository Trust & Clearing Corporation’s (DTCC) managing director and general counsel Larry Thompson has this week cautioned that data sharing arrangements between regulators could be disrupted by the legislative language of Dodd Frank and the global pushback on US extraterritoriality. This issue is of particular concern for DTCC given its intent to act as the data collection agency underlying the Office of Financial Research (OFR) and its position as a swap data repository. To this end, Thompson said that foreign regulators are unlikely to grant US-based data repositories indemnification in exchange for access to data as required by the Dodd Frank Act.
Thompson, who has frequently spoken out about the importance of data repositories for the market, explained in testimony before a House Agriculture subcommittee this week: “The underlying legislative intent of the Dodd-Frank Act could be subverted by the legislative language, preventing the exchange of information between regulators and frustrating efforts to identify and mitigate international financial risk and fragment regulatory oversight on a jurisdiction-by-jurisdiction basis.”
The issue at the heart of this concern is that the indemnification provision of Dodd Frank could create unintended negative consequences, including undermining efforts to enhance transparency and mitigate systemic risk in the OTC derivatives market. Without an indemnity agreement, swap data repositories may therefore be legally precluded from providing critical market data to regulators overseas. As a result, foreign jurisdictions could be incentivised to create their own local repositories to avoid indemnification; a move that the DTCC is concerned would lead to data fragmentation.
Of course, much of Europe is concerned about the extraterritoriality contained within Dodd Frank, including the regulators. Just look at the comments made by Paulina Dejmek, who works directly with the European Commission’s Internal Market and Services commissioner Michel Barnier, at a recent event in London for proof. She noted that the US regulators and the EC are in serious discussions about extraterritoriality and its implications for financial institutions outside of the US that may be compelled to provide raw data direct to (and, more importantly, answer to) the US regulatory community.
This makes the idea of a centralised OFR data collection hub or a single data repository problematic due to national and political concerns about control of that data. The DTCC is obviously in favour of a single hub approach and wants to ensure that the legislative language at the outset does not stir up a hornet’s nest, hence Thompson’s comments and concerns. After all, DTCC currently operates a global Trade Information Warehouse (TIW), a centralised, global electronic data repository containing detailed trade information for the global credit default swap (CDS) markets
“A proliferation of local repositories around the world would make it very difficult to obtain aggregated data for any particular asset class, impair market and regulatory oversight, create inconsistencies in data, frustrate data analysis and increase systemic risk. There was no legislative history behind this provision, which was incorporated very late in the legislative process, nor was the indemnification requirement considered in the hearing process. DTCC believes the indemnification provision will significantly impede global regulatory cooperation,” he suggested.
Thompson noted that while “technical correction” legislation would address the issue, he urged the subcommittee to consider interim measures as well, including recognising regulators who operate in a manner consistent with international agreements or regulatory forums, such as the OTC Derivatives Regulators Forum (ODRF), which includes maintaining the confidentiality of data. In addition, he said modifications to the Dodd Frank Act could also include provisions that deem compliance with those international agreements or regulatory forums as consistent with the indemnification requirement.
DTCC also recently launched an automated portal aimed at providing regulators worldwide with direct, online access to global CDS data registered in the TIW. The vendor indicates that 25 regulators around the world have registered and are active on the portal, which allows for each registered regulator to access reports tailored to their specific entitlements as a market regulator, prudential or primary supervisor, or central bank.
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