In addition to its recent trade repositories paper, the International Organisation of Securities Commissions (IOSCO) has published a paper urging regulators to consider bolstering their oversight of the commodities markets, which includes recommendations to introduce international data standards and classification schemes. As part of its series of proposals to improve post-trade surveillance methods, it suggests that these standards could facilitate cross border data aggregation, although it notes they “may be difficult to achieve initially.”
The paper indicates that the goal is to enable regulators to better collect and analyse data from the commodities markets using both automated systems and human analysis in order to detect trade practice abuses “including breach of position limits, wash trades, and banging the close.” Aggregation of data for these purposes is therefore important to the process in order to provide a “prompt and comprehensive overview of a market participant’s overall position and activities in relation to the market and to related markets.”
To this end, it states: “Effective arrangements should be in place to permit market authorities to analyse on-exchange and related physical market and OTC derivatives activities, when needed, on an aggregated basis. When a large position is detected, a market authority should have the ability to collect information that permits it to identify positions under common ownership and control and to identify aggregate exposures.”
However, in order to achieve this, regulators need to be able to roll up that data to the top level of a legal entity hierarchy and track instrument data across the global trade lifecycle across counterparties. And this, as noted by many national regulators and IOSCO for other markets, requires a level of standardisation of the data that is provided to this community by firms active in the commodities markets. Of course, “adequately skilled staff and automated analytical resources” are also required, but standards are a key part of all of this.
As well as market surveillance purposes, IOSCO also notes that this data could be used to monitor the financial integrity of a particular firm and thus reveal systemic risk. This could therefore play a role in meeting the aims of the Financial Stability Board (FSB) and regional bodies such as the European Systemic Risk Board (ESRB), as well as playing into the work of the US Treasury’s Office of Financial Research (OFR).
On the subject of standards directly, the paper refers briefly to the challenge that may be ahead: “Standardisation of data collected across markets may be difficult to achieve initially but would, in due course, foster improved cross border surveillance of linked international and domestic markets.” The consistency of these standards across global markets is therefore very important in this context and harmonising reporting classifications is another key area.
IOSCO is convinced that the standards and classifications route is the one to go down in order to be better able to understand and interpret moves within the market. It states: “Market authorities should consider adopting a system of internationally consistent account classifications for international markets that have significant cross border impacts to distinguish the various types of trading, such as commercial trading. The analysis of such classifications is complex. For example, a trader may be classified as a commercial in some commodities and as a non-commercial in another. Moreover, these classifications may change quickly over time.”
Of course, harmonising data is only one aspect of all of this, access to this data is the other important pre-requisite and one that has proved somewhat controversial over recent months. IOSCO is therefore championing the rights of national regulators to have the authority to access information on a routine and non-routine basis for regulated commodity derivatives markets as well as the power to obtain information on a market participant’s positions in related OTC commodity derivatives and the underlying physical commodity markets.
Legal entity identification (LEI) and need for hierarchical data is highlighted within the report in a practical sense: “A broker’s direct client (first customer level) who signed the account documentation in reality may be operating on behalf of an unknown person who controls the account (the beneficial owner). A market authority must be able to identify such a beneficial owner in order to aggregate positions.” The need for additional layers of client data are therefore suggested by IOSCO in order to identify an account’s ultimate owner, thus regulators must be granted additional powers and provided with the tools to conduct such an endeavour.
IOSCO also notes the importance of the new data repositories in all of this work: “The development of trade repositories for OTC instruments will facilitate access to previously opaque OTC transaction data. The availability of this information should prompt market authorities to evaluate the scope, frequency and utility of accessing such information.”