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Regulators Continue to Raise Profile of Derivatives Data Challenge, Market Fights Back

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In keeping with this year’s regulatory focus on data challenges within financial institutions, this week, US Securities and Exchange Commission (SEC) chairman Mary Schapiro has been discussing the importance of accurately tracking derivatives data. She has been stressing the critical need for regulators to gain more access to information on derivative transactions in order to better monitor market abuses.

This all adds fodder to the canon for data managers, who can use the requirement for better auditing and tracking of derivatives data as a rationale for investment in enterprise data management (EDM) implementations. Schapiro is just one of a number of regulators that have been raising the issue of transparency into the derivatives market, which is all part of the wider overhaul of the global regulatory framework.

In June, Schapiro informed a Senate panel about the difficulties being experienced by the regulatory community in the endeavour to identify derivatives investors and determine the size of their trades. The lack of standardisation within this particularly opaque corner of the market has proved to be antagonising for the regulatory community and this has therefore become an integral part of the overhaul plan.

The decision to force more credit derivatives trades onto exchanges and clearing houses should ensure that a greater level of data standardisation is achieved at the instrument level. The SEC has already done this with the credit default swap market (CDS) and is seeking to expand this approach to other OTC areas.

The European Commission is also keen to effect similar moves in the European region, as indicated by its recently released plans for an overhaul of the derivatives sector enshrined in its consultation paper last month. However, these proposals have not gone down well in all corners of the derivatives market, with many participants wary of forcing CDSs and other derivatives onto exchanges.

The International Swaps and Derivatives Association (ISDA), the Securities Industry and Financial Markets Association (Sifma), and the London Investment Banking Association (Liba) have this week published a joint response to the Commission’s proposals indicating their concerns about going too far in the effort towards derivatives standardisation. “The real economy faces diverse risks and depends on privately negotiated derivatives to address them effectively. As long as risk itself is not standardised, then tailored instruments will remain important,” explains Robert Pickel, chief executive of ISDA.

The Commission is due to publish definitive regulatory proposals by the end of the year, following this period of feedback, and these associations are keen to ensure that the regulatory community does not overstep its bounds. “We believe the regulatory focus should be on process uniformity, not product uniformity,” Pickel continues.

The proposals are likely to include higher capital charges for derivatives brokers that opt not to use electronic platforms for trading and clearing of these instruments and this is where the most controversy seems to lie. ISDA et al believe that existing capital charges are enough to motivate the industry to standardise derivatives data.

They are also wary of the use of centralised data repositories for these instruments because they feel this may hamper attempts to innovate in the market. The statement warns that it is “critical that their usage does not curtail the flow of new products to the market and fully respects the global basis on which these products trade”.

The resistance towards standardisation within the derivatives market has long been a problem for the data management community charged with tracking and keeping on top of this complex data. Hopefully, by raising the profile of the problem, regulators can inspire financial institutions to take matters into their own hands rather than being compelled to comply.

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