The subject of a European-based trade repository for the credit default swap market has long been a bone of contention between regulators and industry participants in the derivatives market, but it seems that the Depository Trust & Clearing Corporation (DTCC) is hoping to solve the issue by setting up a new subsidiary on European shores for the market. The DTCC Derivatives Repository Limited will therefore maintain global credit default swap data identical to that maintained in its New York-based trade repository, the Trade Information Warehouse, thus circumventing the possible problem of inconsistent data across jurisdictions (or so the plan goes).
Currently, the DTCC’s Trade Information Warehouse is the only recognised data repository for OTC credit derivatives, following its approval by the Fed as such earlier this year. The DTCC finally won approval to establish its Warehouse Trust subsidiary, which operates the repository, as a regulated entity at the start of 2010 after a solid year of campaigning.
According to DTCC, the move is intended to help ensure that regulators globally have secure and unfettered access to global data on CDSs, as requested by Michel Barnier, the European Commission’s internal market and services commissioner, back in April, by establishing identical CDS data sets on two different continents. Stewart Macbeth, managing director and general manager of the currently operating Trade Information Warehouse, explains: “DTCC has always envisaged a ‘global solution’ for repository services supporting each OTC asset class. It is very common for counterparties to be located on different continents and to trade on underlying securities issued across borders. This means that repositories for any asset class need to maintain global information to be useful. It also means that steps need to be taken to ensure that the data is always available to regulators globally regardless of events and circumstances taking place in one location or another.”
The issue of whether there should be a single global repository or multiple has caused some degree of friction in the political arena. The concern of those in favour of a single repository is that data may become too fragmented across multiple repositories and this would negate the benefit of establishing a repository in the first place. After all, regulators are seeking to have a more consolidated view of the markets globally.
But those on the side of multiple repositories, especially a European one, are concerned that a US-based repository would not provide enough access to non-US regulators. Europeans are keen for a European-based repository to be established in order to ensure that they also have guaranteed easy access to the required data in the case of the default of a systemically important financial institution or another market crisis. The issue is also deeply political, as the regulators are not keen to cede power to the US in this space.
This means that the DTCC’s proposals may solve these issues by providing identical repositories in both continents. The European repository will be headquartered in London under a regulatory application filed with the Financial Services Authority (FSA) in the UK. The decision to establish the repository in London is based on a mandate by the International Swaps and Derivatives Association (ISDA) granted earlier this year.
However, this decision may prove problematic at a European level, given previous attitudes to London-based clearers from some corners of the regulatory and political arena. There may be renewed calls for a more European-based (read Continental European) alternative.
In the meantime, the proposals certainly meet the requirements set out in recent consultation papers on the subject, for example the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organisation of Securities Commissions’ (Iosco) paper released in May.