It may have taken a solid year of campaigning but the Depository Trust & Clearing Corporation (DTCC) has finally been granted approval by the Fed to set up a subsidiary to operate its Trade Information Warehouse as a data repository for OTC credit derivatives. The new subsidiary, which has been dubbed the Warehouse Trust Company, will be directly regulated by the Federal Reserve and the New York State Banking Department but aims to have global scope.
The move is all part of the regulatory agenda to drive down counterparty risk in the OTC derivatives markets, as identified by the G20 last year and recently highlighted by the Joint Forum Report. Although the data repository will be directly regulated by the two US-based regulators, it is also expected to be subject to a global cooperative oversight framework involving other US and non-US regulators.
The idea of centrally storing counterparty and instrument data in order to provide greater transparency into the market is seemingly a common theme across the industry. The European Central Bank’s (ECB) proposed reference data utility is another similar proposal, albeit a much more wide ranging (and therefore practically more challenging) one. In the meantime, the DTCC’s repository should help to support the introduction of greater levels of standardisation in the entity and instrument data space across the industry as a whole by providing a centralised store for this data.
Peter Axilrod, DTCC managing director for new business development, elaborates on what he sees as the main benefits of the repository: “In establishing the Warehouse Trust as a regulated entity, our aim is to ensure that regulators, wherever they are located, have unfettered access to the information they need to assess risk exposure in this global market, and that industry participants have the assurance of that regulatory oversight over the critical infrastructure that supports their market activities.”
The Trade Information Warehouse provides a range of automated downstream processing services for recorded contracts, including the netting and settlement of credit default swap (CDS) payment obligations in multiple currencies (through a partnership with CLS Bank International), processing of credit events (such as bankruptcies) and so-called “successor” events such as mergers, acquisitions and reorganisations. DTCC also publicly releases weekly aggregate information on OTC credit derivatives.
The DTCC has been working with the regulatory community for some time to provide it with greater access to data on OTC derivatives, adds Stewart Macbeth, DTCC managing director and head of the Warehouse. “The industry, working with DTCC, has provided regulators with voluntary access to OTC credit derivatives trade records for the past year,” he explains.
The Warehouse, established in 2006 in collaboration with members of the OTC derivatives industry and regulators, now has a global customer base that includes all the major credit derivatives dealers and more than 1,700 buy side firms in 52 countries. In terms of its impact on the market thus far, DTCC points to the Lehman bankruptcy as an example of the Warehouse in practice, as it was able to provide a central repository of data for counterparty risk assessment purposes. The Warehouse therefore indicated that net liabilities on CDSs written on Lehman were less than US$6 billion in total.
In November, the New York State Banking Board also approved DTCC’s application for Warehouse Trust to be regulated as a limited purpose trust company, so the Fed’s approval is the final regulatory approval needed for the new subsidiary. According to the DTCC, the Warehouse Trust will begin operations once certain organisational conditions have been met, which are expected shortly.
As of 29 January 2010, there were about 2.3 million contracts in the Warehouse with a gross notional value of US$25.5 trillion. It also contains non-legally binding trade data on about 145,000 highly customised credit derivatives contracts worth an estimated US$4.5 trillion as of 31 December 2009. In October 2009, DTCC and MarkitServ a joint company created by DTCC and Markit, were selected by the industry, through a proposal process run by the International Swaps and Derivatives Association (ISDA), to develop and run a global repository for OTC equity derivatives trades. That repository is scheduled to be initially operational in July 2010.