The Financial Stability Board (FSB) has set up a feasibility study to consider how OTC derivatives data reported to trade repositories can be aggregated and shared among authorities monitoring risks to financial stability. The options for data aggregation being investigated by the study include a centralised model, a logically centralised model based on federated data collection and storage, and the collection of raw data from local repositories and its aggregation by individual authorities.
The study is a response to a call from G20 Finance Ministers and Central Bank Governors, and is described by the FSB in its sixth progress report on the implementation of OTC derivatives market reforms, which was published this week. The FSB initially offered its support for a study of the feasibility of a system to share global aggregated data in its fifth progress report published in April 2013.
The study group that will consider feasible options for aggregating trade repository data – its members are not named – expects to publish a report for consultation in February 2014 and a final report by the end of May 2014. Its remit includes a stock take of the current use of trade repositories to better understand the range of information reported and needed, as well as any variation in standards and formats. Its outcomes, in terms of information and technical analysis, are expected to ‘provide important input to assist senior policy-makers in their decision on whether to initiate work to develop a global aggregation mechanism, including approaches to data aggregation’.
Detailing the options to be explored, the report lists:
1. A physically centralised model of aggregation. This typically involves a central database (hub) where all the data are collected from trade repositories, stored and subsequently aggregated within the central database for onward provision to authorities as needed.
2. A logically centralised model of aggregation based on federated (physically decentralised) data collection and storage. Logical centralisation can take a number of forms but the key feature is some type of logical indexing mechanism that enables the use of technology to aggregate data from local trade repository databases rather than the use of a physically central facility. In this option the underlying transaction data remains in local trade repository databases and is aggregated with the help of the central index (using pointers to local databases). One variant of logical centralisation is a model where the data is collected and stored locally but, instead of authorities using the logical indexing mechanism themselves to obtain the data from local databases, there is a designated agent that maintains the central index and the platform for responding to requests from authorities.
3. Collection of raw data from local trade repository databases by individual authorities that then aggregate the information themselves within their own systems.
The report goes on to suggest that other aggregation models could also be explored, but states that for each option the study will: set out the steps that would need to be taken to develop and implement the option; review the associated (and potentially interdependent) legal and technical issues; and provide a description of the strengths and weaknesses of the option, taking into account the types of aggregated data that authorities may require and the uses to which the data might be put.
Focussing on trade repositories, the FSB reports that as at August 2013, 22 trade repositories in 11 jurisdictions were, or will be, operational. It is not expected that repositories will be located in all jurisdictions, but rather that regulatory frameworks will, in some instances, facilitate reporting of market participants’ transactions to foreign domiciled repositories that are recognised, registered or licensed locally.
If this is the plan, the FSB cautions: “At present, the practical availability of trade repositories is quite uneven among FSB member jurisdictions, with very few authorised to operate in multiple jurisdictions and some jurisdictions requiring that domestic reporting be only to trade repositories run by domestic authorities or operators. In some jurisdictions, firms are only permitted to meet their reporting obligations by reporting to trade repositories that have been appropriately authorised in the jurisdiction (or alternatively granted an exemption from being authorised) in which the trade repository is offering services. In these jurisdictions, therefore, participants cannot meet their reporting obligations until relevant trade repositories have been authorised, recognised, or granted an exemption from a registration or licensing regime.”
On a wider basis, the FSB report provides a comprehensive review of market participants’ readiness for market reforms emanating from a September 2009 G20 agreement that states: “All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements. We ask the FSB and its relevant members to assess regularly implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.”
The report is predominantlypositive about FSB member jurisdictions’ responses to the requirements for OTC derivatives market reform. It notes that market participants are more advanced in their readiness for reform where regulatory regimes and requirements are more settled, and states that the use of centralised infrastructure is most advanced in trade reporting and central clearing of OTC interest rate and credit derivatives. Progress in the central clearing of products in other asset classes is slow and the use of organised trading platforms is not widespread in any asset classes.
The report also notes that the role and concentration of intermediaries that provide access to centralised infrastructure appears to be growing and suggests increased concentration can be expected as OTC derivatives markets reconfigure in response to the reforms. On this, the report comments: “It will be important to monitor developments as buy-side demand for access to centralised infrastructure increases, and in particular, the commercial responses of firms that currently or prospectively facilitate such access.”
Finally, the report considers cross-border activity in many OTC derivates markets and the need for clarity in how jurisdictions’ regulatory regimes interact.