Last week, I looked at some of the data reporting requirements related to the systemic risk oversight developments going on in the US with regards to scrutinising the hedge funds and private equity markets (see more here), however, the US regulators have not been alone in their efforts on the data standards front. The International Organisation of Securities Commissions (IOSCO) and the Bank for International Settlements’ (BIS) Committee on Payment and Settlement Systems (CPSS) also wrapped an important consultation exercise last week on the oversight of the OTC derivatives markets, in which 32 individuals, associations and financial institutions provided their feedback on the topic of data reporting.
In August 2011, the CPSS and the Technical Committee of IOSCO released their consultative document “Report on OTC Derivatives Data Reporting and Aggregation Requirements” with a request that any interested parties should provide comment on the subject by 23 September 2011 (my coverage of the report at the time is available here). CPSS and IOSCO duly received responses from a whole range of industry participants including: associations such as Sifma, the European Fund and Asset Management Association (EFAMA) and ISDA; financial institutions including Deutsche Bank and the South African Reserve Bank; interested individuals from various firms; and a range of vendors and market infrastructure providers including Markit, Swift, Tullett Prebon and (unsurprisingly) DTCC.
As for what the initial report covers (to which 32 firms have responded to), it explores the means via which OTC derivatives data should be collected, stored and disseminated by trade repositories across the globe. The report notes the information gaps that currently exist in the regulatory arena, including the lack of a legal entity identification (LEI) standard, which it says is an “essential tool” for data aggregation purposes. The group also indicates that an international product classification system for derivatives is the correct direction to be moving.
As with my previous summary of the responses to the Office of Financial Research’s (OFR) data standards related proposals earlier this year (see here), I thought I’d give a few high level highlights from the 32 responses to IOSCO/CPSS, which I have split into two parts (this is the first 16 responses)…
Pricing vendor Argus Media’s response asks for “further guidance” on what kind of data should be made available for public dissemination via trade repositories – no doubt to allay some of the concern that data vendors are feeling with regards to business being taken away from them via publicly available data (see MiFID’s consolidated tape discussions for another such example). It cautions that “careful calibration” should be put in place to ensure the right data is being provided in aggregate form in order to avoid any “unintended market distortions” to asset classes where vendors are already providing this data – it uses the energy derivatives market as a particular example.
Bank of Russia
The response pays particular attention to data sharing practices cross border and the overall role of these trade data repositories within markets, noting that they should not compete with firms such as broker-dealers in their activities and that they must have adequate capitalisation and risk management systems in place. Bank of Russia is keen for more clarity and information about the reporting process and for data sharing agreements between domestic repositories to be put in place to avoid duplicate reporting requirements.
European bank BBVA raises concerns about the dissemination of what it calls “sensitive data” and stresses the importance of keeping data that could be of economic importance to an entity confidential. It reckons data regarding netting agreements and collateral arrangements should not be stored by trade repositories as they “should not act as calculation or collateral agents.” It also suggests that the introduction of a legal entity identification (LEI) standard should be industry led rather than legally enforced.
The German banking association calls for harmonised principles and standards for all trade repositories in order to achieve the necessary consolidation of data. To this end it refers to the second iteration of MiFID as a means via which Europe can get on the same page with regards to data standards and reporting practices. The association is keen for IOSCO/CPSS to conduct further research into the impact of introducing additional reporting requirements, suggesting that current data collection practices should be evaluated before new requirements are put in place. It argues that if new reports are introduced, some degree of flexibility should be permitted with regards to formats to allow for the use of “various systems for submitting reports.” It also raises concerns about the level of data that is to be made available to the public.
On the subject of the LEI, it states: “To enable equitable and impartial supervision, the LEI and the organisations commissioned to establish and run the system should be supervised at both national and international level. Furthermore, LEI governance should be sufficiently open to take account of both market participants and jurisdictions subsequently subscribing to the system.”
On derivatives instrument IDs, it suggests that a new product classification and identification system should be put in place, noting efforts by ISDA to this end as a starting point for a “step by step” approach.
The non-profit organisation, which is focused on the capital and commodities markets, suggests that beyond just guidelines for data collection, the report should include details about the “system of integration” for that data. It suggests that data aggregation should include categorisation of raw data using a “common language” and that more data should be collected about counterparty exposures in uncleared derivatives for example. In contrast to many of the other responses, Better Markets is keen to see much more data sets being collected by trade repositories, including data related to valuations and margin collateral. It champions the idea of a central registration agent for LEIs and instrument IDs to provide a “single point of responsibility” with support from regulatory compulsion.
FRSGlobal’s Willi Brammertz
Brammertz, who is senior risk advisor at vendor FRSGlobal, suggests details about the “form and structure” the derivatives contract data should take in order to allow for the monitoring of systemic risk. He highlights three components that must be assessed to this end: risk factors; portfolio details; and risk effects. He suggests that rather than focusing on semantics, repositories should aim to standardise contracts at the level of the financial contract and its related transaction system algorithm.
The German association is keen for trading and clearing venues to be used as the conduit for reporting to trade repositories rather than requiring separate reporting processes. BVI is keen for a further industry consultation on the most suitable standard and messaging formats for reporting and use of centralised information platforms for this data, and the provision of this data out to the public only in aggregate form. The association is also championing the use of ISO standards in this process and on the LEI front, as well as its support of the DTCC-Swift-ANNA proposal to act as issuer and facilities manager for the standard.
Data vendor CapitalTrack promotes its own platform for the asset backed securities (ABS) space as a model of how there are existing available sources of master agreements, valuation and credit support annex data to be able to monitor the derivatives markets. It states that the challenges of collecting this data “have been overcome to a large extent using a commercial business model, web tools and web-based databases.” The vendor has also been working on its own in-house LEI: the CT code, which is unique to the issuer. On the instrument ID side, it suggests lawyers or S&P as the parties best suited to dealing with this data.
The consulting firm highlights the potential reporting burden that may fall on some of the smaller players in the market (small banks, end users) and asks IOSCO to conduct an impact assessment. It also notes that efforts to collect derivatives data may turn out to be “time consuming, costly, and likely prone to error.” On the subject of an LEI, it states: “an entity identifier system would require broad communication efforts to all end users, permit sufficient time to comply, be reasonably easy to access, and incur little to no additional costs.”
Barnard is keen for OTC derivatives data records to be retained by trade repositories “indefinitely” and is generally in favour of most of the data related proposals within the IOSCO/CPSS paper.
The German headquartered bank asks the regulatory community to give “greater consideration” to the “real practicalities” of data collection by focusing on quality rather than quantity of data. The bank is concerned that the regulators may be swamped with data as current proposals stand and that they should instead look at data on a portfolio basis. “Transaction-level data will not allow regulators to see whether a particular transaction has an offsetting hedge,” is states. Deutsche Bank also notes that some risk data may be missed in the current set up, so there should be “a more interactive dialogue with the industry to establish a more efficient way to obtain this risk information.” The bank indicates support for the ISO LEI that has been proposed and refers to the ISDA product classification system as an opportunity for further development of an instrument ID system.
Unsurprisingly, DTCC champions its role as a global trade repository and a data infrastructure provider for the derivatives market, detailing its capabilities and recent developments such as the launch of its global regulatory portal (see more here) and its pitch to be facilities manager for the LEI standard. It is keen to be appointed as the centralised point for this data in a cross border context.
European Banking Federation
The EBF asks for regulators to take into account an impact assessment of these new requirements and the potentially “substantial compliance costs for the industry.” Data disclosure is another point of caution with regards to publically available data and EBF notes a number of “practical design, implementation and financial challenges” in aggregating data on the basis of global identifiers. Reporting requirements need to be “clear and concise” and a phased implementation is proposed by EBF.
European Fund and Asset Management Association
EFAMA suggests that further industry consultation is needed on the subject and that “open international industry messaging and communication standards” should be used in the final solution. It supports the ISO proposed LEI and the Swift/DTCC/ANNA pitch for the utility, but notes that “appropriate governance” needs to be put in place.
Federation of Euro-Asian Stock Exchanges
FEAS reckons greater consideration should be given to which firms should be required to report to trade repositories and how many of these repositories should be introduced, given the potential for data fragmentation. It supports the idea of an LEO without referencing any particular initiative, ditto with regards to instrument classifications and IDs.
Global Foreign Exchange Division (of Sifma/AFME/Asifma)
In line with its support of the Swift/DTCC/ANNA bid, the response explains the benefits of the proposed ISO LEI and these parties’ role in such a development. It suggests that on the trade repository front, there should be a preferred partner in the form of the Swift/DTCC partnership for the FX markets. It also expresses support for the ISDA unique product ID work. Where local repositories are present, it suggests that a licence should be required from the global repository in order to ensure data formats are compatible. It also notes that a phased approach to implementation is more practical.
That’s the first 16, my next blog will detail the responses from the other 16 parties…