Regulators and other key stakeholders of the over-the-counter derivatives market must work together to eliminate cross-jurisdictional differences in the adoption of standard reporting requirements in the industry, according to the Depository Trust & Clearing Corporation (DTCC).
This would involve paring down the list of 110 critical data elements (CDEs) for derivatives trade reporting to only the most important elements that then can be aggregated across jurisdictions, says DTCC, a New York City-based provider of clearing and settlement services for the financial industry, in a new paper released on Tuesday (March 16).
“OTC derivatives trade reporting standardization would enable regulators to reach the level of transparency and global risk monitoring identified as critical by the G20 summit, but has been a challenge to achieve for individual jurisdictions,” says Chris Childs, DTCC managing director and head of repository and derivatives services. “With several trade reporting rule sets currently under regulatory review, now is the time to work together and continue to progress against these objectives, and more specifically, to align individual jurisdiction trade reporting rules to facilitate global market transparency.”
The CDEs were identified by the Committee on Payments and Market Infrastructures and the Board of the International Organization of Securities Commissions working group on harmonization. The CDE initiative was designed to promote the data harmonization critical to enabling data aggregation and systemic risk transparency. However, disparate adoption of the CDE and other reporting standards across jurisdictions will hinder the achievement of the objectives set by the Group of 20 at its historic 2009 summit in Pittsburgh, Pennsylvania, DTCC says.
The Pittsburgh summit sought to adopt a framework for balanced and sustainable growth and strengthen the international financial regulatory system following the 2007-2008 global financial crisis.
While the industry and regulators now have greater insights into market risks, insufficient alignment of reporting requirements across jurisdictions could impede the global aggregation and analysis of OTC derivatives transaction data reported to trade repositories. This could lead to a lack of transparency across jurisdictions, which could hinder regulators’ ability to adequately monitor systemic risk.
The European Securities and Markets Authority and the Commodity Futures Trading Commission have taken the lead in moving to adopt the CDEs defined by the harmonization group. Additional regulatory bodies are now in the process of doing the same.
Unfortunately, these efforts fall short of aligning trade reporting rules across the globe, DTCC says. “As each jurisdiction implements rules updates that don’t align in terms of standard data elements, firms remain in a cycle of updating their reporting systems to meet new rules that don’t lead to a common data set across jurisdictions. This is both operationally inefficient and fails to achieve the goal of transparency.”
DTCC urges the industry to finish the ISO 20022 CDE message scheme for OTC derivatives, setting a definitive timetable for completion, and universally adopt a single ISO 20022 message as the common data standard and format for reporting to trade repositories. A common messaging standard would help drive data consistency across trade repositories and jurisdictions, it says.
The industry must also furnish the Legal Entity Identifier Regulatory Oversight Committee with adequate resources in order for it to successfully serve as the central governance body for CDE. universal product identifiers and universal transaction identifiers, as designated by the Financial Stability Board on October 1 2020.
“It is critically important that we embark on these efforts now and capitalize on this unique moment to enhance systemic risk mitigation before market participants begin their next round of updates to conform to the latest rules revisions, some of which are projected for implementation in 2022,” Childs says.
