The Committee on Payment and Settlement Systems (CPSS) and the International Organisation of Securities Commissions’ (IOSCO) joint working group last week produced a consultative report on the means via which OTC derivatives data should be collected, stored and disseminated by trade repositories across the globe. The report notes the information gaps that currently exist in the regulatory arena, including the lack of a legal entity identification (LEI) standard, which it says is an “essential tool” for data aggregation purposes. The group also indicates that an international product classification system for derivatives is the correct direction to be moving.
On the subject of the LEI, the working group reckons trade repositories should have an active role in the ongoing entity identification discussions that are currently taking part across the globe. The US led initiative that kicked off as part of the Office of Financial Research’s (OFR) goal of setting instrument and entity ID standards in order to track systemic risk is currently engaging in an outreach programme to ensure international consensus is reached on the subject of a new LEI, so these repositories should have ample opportunity to follow the working group’s advice. After all, the US Treasury agency has noted that a final decision will not happen before the end of the year and they will have at least four months to get in on the action, if they haven’t already.
Up until now, one trade repository provider has dominated the scene: the Depository Trust and Clearing Corporation (DTCC), which, alongside partner Swift, has been championed by a number of industry participants (the group selected to provide feedback to the OFR on the subject, no less) as the suitable candidate to act as the facilities manager for the introduction of such a standard. Whether this will change as a result of further international input before a final decision is made by the OFR next year has yet to be determined (but is, admittedly, unlikely).
On this note, the paper states: “To promote timely development of an LEI system suitable for international use, the Task Force recommends that the industry process include development of an LEI standard and issuance of LEIs under the auspices of an organisation with international membership and appropriate governance that develops and publishes international standards for the financial sector.” Sounds pretty similar to a description of Swift and DTCC…
The recommendations regarding the development of a standard international product classification system follow a similar tone, with the group suggesting that the CPSS, IOSCO or the Financial Stability Board (FSB) should make a public statement on the subject: “calling for timely industry-led development, in consultation with authorities, of a standard product classification system that can be used as a common basis for classifying and describing OTC derivatives products. Therefore, the Task Force recommends that the FSB direct, in the form and under the leadership the FSB deems most appropriate, further consultation and coordination by financial and data experts, drawn from both authorities and industry, on a timely basis, concerning this work.”
The paper also references the European Central Bank’s head of external statistics Francis Gross’ presentation when highlighting the current patchwork of identifiers that are currently used by the industry and the proposals why LEIs and standard instrument IDs could therefore be useful as data aggregation tools. It also references the work of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) in their attempts to develop standardised algorithmic descriptions for financial derivatives.
Setting all of this into the context of the consultation paper, CPSS and IOSCO believe that trade repositories should act as centralised data hubs in order to improve the transparency into OTC derivatives markets for regulators and, with regards to certain aspects of the data, the public at large. This consultative report, which is the culmination of the work requested by the G20 when the joint working group was formed back in September 2009, is therefore aimed at determining the process via which firms should report to these new market infrastructures and via which these repositories themselves should report this aggregated data to the public.
To this end, it addresses Recommendation 19 in the October 2010 report of the Financial Stability Board (FSB), which asked for details of minimum data reporting requirements and standardised formats; and the methodology and mechanism for data aggregation on a global basis. The introduction of an LEI standard is therefore only one part of this data puzzle, on which industry participants have until 23 September to comment (emails can be sent to the CPSS secretariat on firstname.lastname@example.org and the IOSCO secretariat on OTC-Data-Report@iosco.org).
The paper recommends that at a minimum, transaction level data should be reported to these repositories, comprising transaction economics (termination dates, coupon amounts etc), counterparty information (LEI), underlier information (a unique code for identifying underliers such as registration authority, security type etc)), operational data (transaction ID) and event data (timestamps). Extra data that is likely to be required to be reported could therefore encompass: current exposure, netting and collateralisation details on bilateral portfolios of off-exchange transactions; current market values of individual open OTC derivatives transactions; and information on collateral assets that are applied to OTC derivatives portfolios, including the valuation and disposition of these assets.
In terms of data sharing, the paper suggests that as well as sharing data with regulators and other authorities (such as resolution authorities engaged in dealing with living wills), these repositories should also share the data with the firms themselves: “reporting entities and counterparties should have appropriate access to their own data, subject to confidentiality and other legal requirements.” The availability of the data to the public at large and the level at which this data is disclosed (granular or aggregate) should be left at the discretion of the national regulator, the working group suggests.
These data sharing recommendations are likely a means of sidestepping (for now at least) some of the privacy and disclosure concerns that industry participants have raised since the announcement of these new reporting requirements. Firms are concerned about the impact that this disclosure will have on OTC markets, given that some have a very limited number of counterparties, as well as the confidentiality issues that have been raised time and time again with regards to regulatory data sharing.
The group is planning to publish its final recommendations by the end of this year, in keeping with the planned timeline for all derivatives to be centrally cleared and transactions reported to repositories by the end of 2012. Regulators will therefore need to alter their reporting requirements in line with the recommendations in order to ensure they are on the same page globally regarding data standards and aggregation practices, although there has been no hard deadline set for this change from current discretionary practices.