The reform of the OTC derivatives markets as part of the US Dodd Frank Act will likely cause a whole heap of instrument identification challenges, according to Jim Perry, vice president of product data quality at Goldman Sachs. Speaking at last week’s FIMA conference in London, Perry indicated that the central clearing of these products would require the development of new standard instrument identifiers for structured products such as swaps, as well as entity identifiers.
“We need to determine how to represent a swap, for example, within trade management and client reporting systems,” he elaborated. Perry sits within the operations department at the investment bank and is therefore currently helping to prepare Goldman for the changes involved in the regulatory reform process, including dealing with these identification challenges.
The identification of underlying entities involved in credit default swaps (CDSs) and similar structured derivatives could also pose a problem, he added. “There is no universally accepted legal entity identifier across the market, so it will be a challenge to determine what to use to identify the institutions related to credit derivatives,” Perry explained.
This concern about the lack of an entity identifier was a common theme throughout the conference, in the face of developments such as the Office of Financial Research and greater regulatory attention on the standardisation challenge. Perry noted that the direction that the US moves in would likely determine what happens in the rest of the world with regards to both instrument and entity identifiers.
The regulatory community is also seemingly apprised of the challenges and potential costs involved in introducing a new set of identifiers and is keen for feedback from the industry. The Commodity Futures Trading Commission (CFTC) commissioner Scott O’Malia commented during a testimony this month: “One important element of this proposed rule is the requirement to establish a unique identifier for every swap, swap transaction, and swap participant. I am eager to receive comment on this provision. While I believe the policy rationale underlying this requirement is sound, I do recognise that the cost burden of such an ID is high and its impact on data storage demands is significant. However, I understand that the domestic and international communities are eager to adopt such a concept and there is no better time to implement such a rule than at the beginning.”
O’Malia noted that the data standardisation challenges underlying the swaps markets will not be simple to solve and suggested that the 75 requests for comment the CFTC has made so far is the “appropriate” approach. He has called for an extension to the current deadline for comments in order to allow the industry to properly assess the 75 proposals.
The industry may also be facing the prospect of two data utilities rather than one – a market data utility as well as the Office of Financial Research’s reference data utility – as part of the proposals made by O’Malia. He described his “strong desire” to reorganise the CFTC’s Office of Information and Technology Services in order to establish an Office of Market Data Collection and Analysis. “This entity will clarify the commission’s technology needs and support the various divisions’ market surveillance requirements,” he said. Let’s hope this one won’t cost another US$500 million to operate…
You can read O’Malia’s full speech here.