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Financial Stability Board Suggests Centralised Trade Data Aggregation System for OTC Derivatives Market

The Financial Stability Board (FSB) is addressing issues of data aggregation for regulatory purposes in the OTC derivatives market with the suggestion of ‘a centralised or other mechanism to produce and share global aggregated data as a complement to the direct access by the different authorities to data held by trade repositories’.

The FSB notes its support for a study of the feasibility of a system to share global aggregated data, perhaps a global data utility, in its fifth progress report on the implementation of OTC derivatives market reforms published last week.

The report considers progress towards the September 2009 G20 agreement that all standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms and cleared through central counterparties by the end of 2012 at the latest. The agreement also requires OTC derivative contracts to be reported to trade repositories, with non-centrally cleared contracts being subject to higher capital requirements. The work of the FSB is to regularly assess implementation and consider whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic risk and protect against market abuse.

In its latest progress report, the FSB notes that implementation of the G20 commitments through the development of international standards, adoption of legislative and regulatory framework, and changes in market structures and activities are not complete and continues beyond the 2012 deadline. It acknowledges, however, that progress is being made and points to issues, including data management, resulting from solutions being implemented to meet the G20 requirements.

The report notes that some trade repositories have begun receiving OTC derivatives data and states on the issue of aggregating data held by trade repositories: “There is a risk of data fragmentation across trade repositories, with different data fields and formats used by trade repositories for collecting data resulting in challenges to aggregating and comparing data. There should be a study of the feasibility of a centralised or other mechanism to produce and share globally aggregated data, or other means by which authorities can achieve the aggregation of data they need for comprehensive and meaningful monitoring and risk assessment.”

Other data issues have also been exposed in trade reporting. The FSB says about half the jurisdictions within its remit expect to have requirements for reporting in at least some asset classes in place in the first half of 2013, but notes that as well as the data aggregation issue, difficulties have been discovered in ensuring necessary data is reported to a trading repository.

The report states: “Reporting a counterparty’s identity to trade repositories may be limited by domestic privacy laws, blocking statutes, confidentiality provisions and other domestic laws. Such barriers may prevent the reporting of information necessary for regulatory purposes. A number of jurisdictions have plans to address these issues as part of their overall reform package, but interim solutions may also be needed. Jurisdictions should continue to monitor the development of or changes in such laws and their proposed reporting requirements to ensure that any planned reforms adequately address barriers to reporting OTC derivatives transactions.”

On the issue of access to data by authorities, the FSB reports that clear and consistent international guidance on appropriate access by authorities to the data in trade repositories is needed so that they can fulfil their mandates on an ongoing basis. Final guidance on this issue is due to be published by the Committee on Payment and Settlement Systems and the International Organisation of Securities Commissions (IOSCO) by September 2013.

The standardisation of data elements in trade reporting is also considered in the report. The FSB states: “To better meet authorities’ needs (including understanding global risks), the transactions data held by trade repositories must be able to be aggregated across various dimensions including, for example, products, counterparties, geography, asset classes and also across several repositories. To facilitate this, at least three steps would be extremely useful: a system of unique, universal identifiers for counterparties, products and transactions; compatibility of reporting data formats; and validation that each transaction record is an accurate representation of the terms of the transactions.”

The legal entity identifier (LEI) first developed under the auspices of the FSB and now the responsibility of the Global LEI Regulatory Oversight Committee is cited as a solution to counterparty identifiers and the FSB reports that industry initiatives are underway to develop globally recognised unique product identifiers and unique transaction/swap identifiers to increase efficiencies in trade reporting. But it cautions: “While the development of the LEI has been internationally coordinated, there has not yet been a strong international regulatory focus on developing global standards for unique product identifiers and unique transaction/swap identifiers and other identifiers.”

On the basis of the FSB’s findings on the implementation of systems to meet the G20 requirements for OTC derivatives trading, the board’s chairman, Mark Carney, has written to member jurisdictions requesting confirmation that legislation and regulation for reporting to trade repositories is in place, and information on timetables to complete all OTC derivatives reforms. He noted the need for solutions to outstanding policy issues, such as the need to remove barriers to trade reporting by market participants and also reiterated the need for further international work on remaining issues around authorities’ access to trade repository data and the feasibility of a centralised or other mechanism to produce and share global aggregated data, taking into account legal and technical issues and the aggregated trade repository data that authorities need to fulfil their mandates and monitor financial stability.

The FSB is expected to publish its next progress report on OTC derivatives reforms ahead of the G20 Leaders Summit in St Petersburg in September 2013.

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