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Stick provides carrot for data community

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It seems that the threat of greater regulatory involvement has spurred on a flurry of activity and innovation in the data community over the last few months. As institutions’ IT purse strings have tightened and closer scrutiny has been paid to areas such as counterparty risk and fair value pricing, vendors have upped their game accordingly.

Not only have valuations become the next big thing, with every vendor in the space either expanding to new areas of coverage, or upgrading their platforms, but these same vendors have also been pushing to get involved in the regulatory dialogue itself. Following the passing of the Federal Reserve and US Treasury’s troubled asset relief programme (Tarp) earlier in October, Thomson Reuters and Bloomberg indicated that they wish to play a direct role in the programme. The vendors are keen to get involved in the area of pricing and risk management in particular, with a view to increasing transparency. They feel they can add much needed transparency to the valuation of the illiquid securities that may be traded by Tarp. Both Bloomberg and Thomson Reuters have publicly stated their intention to get involved in the scheme thus far and many other vendors have been talking up the need for fair value pricing and transparency. Of course, beyond Tarp, the vendor community has also been swept up in the changes happening to the credit derivatives market and the ongoing race between the credit default swap (CDS) clearing house contenders. Players such as CME Group, IntercontinentalExchange (ICE) and Eurex have all elaborated further on their respective plans (see this month’s lead story), although as yet it is unclear what long term impact this will have on the valuations community. Furthermore, if a turf war between the clearing house candidates wasn’t enough, the industry is also witnessing a regulatory battle of the titans, as the Securities and Exchange Commission (SEC) goes head to head to head with the Commodity Futures Trading Commission (CFTC) over regulatory jurisdiction. Bart Chilton, commissioner of the Commodity Futures Trading Commission (CFTC), has repeatedly stated that oversight of the CDS sector should remain under the jurisdiction of the commodity futures regulator. However, there have been calls in the past for the SEC’s role to be expanded to cover the regulation of swaps and these have recently been reiterated. At the start of the month, Republican Edward Markey reintroduced a bill that would expand the SEC’s coverage of derivatives. Currently, swaps are not defined as securities because they are traded off exchange so do not fall under the SEC’s remit. Although there has been no direct decision made by the US government about whether regulatory oversight should fall under the remit of either party in the long run, there have been discussions about CFTC’s regulatory scope in particular. The recent hearings of the House and Senate agriculture committees, which have jurisdiction over the CFTC, came to the conclusion that OTC derivatives are in need of much stronger regulation: no big surprise there then. Tom Harkin, chairman of the Senate agriculture committee hearing, said that it will “revisit and examine very carefully how these financial swaps and derivatives are regulated”, indicating that it will be some time still before a solution is achieved. The industry isn’t just burdened with the pressures of regulatory scrutiny and coping with economic instability, however; it also has to deal with the ongoing challenge of adapting to long-planned changes in the market, such as the Options Symbology Initiative (OSI) due to be implemented by 2010. As with the CDS sector, there is a fair amount of uncertainty in the market about the future of the initiative and how to move forward with the OSI. This lack of clarity across the industry is likely to lead to problems further down the line and it seems that despite the reputational and operational risk that is posed by a lack of standardisation – as proved by other sectors recently – the fire fighting will continue.

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