Following the collapse of Lehman Brothers just over a decade ago, much of the regulatory attention has focused on the risks posed by what were then largely unregulated over-the-counter (OTC) derivatives. Unlike their exchange-traded counterparts (ETDs), such as futures and options contracts, OTC derivatives transactions were opaque to regulators and other parties. This lack of transparency, along with their complexity, was highlighted during the demise of Lehman, and indeed, contributed to the spread of the financial contagion.
In response to the global financial crisis, in 2009 the Group of 20 (G20) leaders agreed on several principles to reform the OTC derivatives markets. Among those was the requirement that OTC derivatives transactions be reported to trade repositories in order to improve derivatives transparency and lower the systemic risk.
Trade repositories provide regulators with information that can be used to proactively detect and mitigate risks in the financial system, and they are also an important tool for monitoring activity, providing market participants and regulators with an unprecedented degree of transparency into the once-opaque market.
In 2013, Singapore approved regulations to enable banks and swap dealers in the city-state to report OTC derivatives trades to a trade repository. Back then, that included Singapore’s largest banks as well as other regional and global banks and dealers. Originally it was just the credit, interest rates and FX asset classes that fell under the regime. However, on 1 October 2018, the Monetary Authority of Singapore (MAS) extended this requirement, obliging in scope firms to report their equities and commodities derivatives transactions to a trade repository. It’s another positive move by the MAS, which will bring further transparency to the OTC derivatives market and bring their regime closer in line with global standards.
In line with this, DTCC’s Global Trade Repository (GTR) service, the only trade repository currently approved by the MAS to operate in Singapore, was enhanced to support equity and commodity reporting. At the same time, the GTR service was also migrated onto a new, enhanced platform as part of a global re-architecture programme that has already been rolled out in Europe and Hong Kong. This re-platforming allows for simplified reporting, increased transparency and greater data quality. This change will also begin to open the door to additional use cases and, as a result, increased value from the GTR service. While the potential benefits of a repository continue to grow, its true value cannot be fully reached until regulations become more closely aligned across jurisdictions and data standards and definitions are harmonized across regimes.
Fragmentation and a lack of standards
According to the Thematic Review on OTC Derivatives Trade Reporting published by the Financial Stability Board (FSB), an international financial body, in 2015, a major roadblock to ensuring data quality and data validation were “inadequacies in data standards both nationally and internationally”. This is not a surprising outcome given the response of national legislators and regulators to the G20 commitments who understandably prioritized domestic trade reporting requirements. It is also an outcome that, three years on, remains a reality.
To better illustrate this, consider that as of 2017, there were as many as 34 trade repositories and regulator-operated reporting entities globally, each with its own data set and rules, thereby hindering authorities across jurisdictions from easily aggregating data to achieve a global, systemic view. At the same time as it increases complexity, this non-harmonized approach to derivatives data standards and requirements contributes to increased compliance costs for market participants.
It is important to recognise that these issues are widely known and are starting to get the attention they deserve. Across Asia, there has been encouraging collaboration within the regulatory community. For example, Australia, Hong Kong and Singapore are among the jurisdictions that allow direct access by foreign authorities to TR data. This cross-border access is welcomed by many in the industry as it has the potential to lower the regulatory burden on market participants. We have seen similar collaboration in the region around complex concepts such as “pair and share” through the use of a commonly defined Unique Transaction Identifier (UTI), which has also been welcomed by the broader industry.
On a global level the picture is also improving in encouraging ways. Reporting formats, identifiers and key fields, referred to as “Critical Data Elements” are being seriously considered across jurisdictions. Regulators increasingly recognise the need for cross-border data aggregation. By aligning standards across jurisdictions, regulators will be able to aggregate data at a global and regional level, providing a better view into true systemic risk. For example, the US Commodity Futures Trading Commission (CFTC) is revising its cross-border framework to decrease derivatives market fragmentation. In addition, it has identified the MAS and the Australian Securities and Investments Commission as 'like-minded' regulators that could, together with CFTC, work in various multilateral and bilateral forums, such as the IOSCO Committee on Derivatives, toward minimized market fragmentation caused by conflicting regulations. These are encouraging signs.
Derivatives reform must continue
We expect the differences across jurisdictions to narrow over time as industry players and regulators harmonize reporting requirements and introduce data standards for OTC derivatives transactions. The journey is far from over though, and it is important to recognise the importance of open dialogue and information sharing as we all work towards an even stronger future state. Contributing to the efforts of IOSCO, the FSB and various other bodies through the sharing of insights, observations and ideas is a critical part of this process, and trade repositories are well positioned to play key roles in this discussion.
Elsewhere in Asia, OTC derivatives reform continues apace. In June last year, the Hong Kong Monetary Authority (HKMA) published the results of an industry consultation on further enhancing its OTC derivatives regime. It recommended, among other things, the use of Legal Entity Identifiers (LEIs) for firms covered by Hong Kong’s OTC derivatives reporting regime. Also in June, the Reserve Bank of Australia (RBA) published an analysis on the value of trade repositories. RBA concluded that TRs have given deeper insights into key markets, commented on the significance of the growing role of central counterparties (CCP) and noted how Australian banks' use of derivatives affect their exposure to interest rate and exchange rate risk. RBA intends to use this information for further research into financial stability risks and financial conditions, and CCP supervision.
At the G20 Pittsburgh summit, political leaders issued a mandate for comprehensive monitoring of systemic risks emanating from the OTC derivatives market. Since then, the industry has travelled an impressive distance along the path to creating a global reporting framework for OTC derivatives transactions. Yet the destination still lies some way ahead. The industry and regulators must continue to work together towards harmonized data standards and trade reporting rules, which will enable a truly global and systemic view of the OTC derivatives markets. We must all work together to complete the journey, united in a commitment to data standards, aggregation and access.
Oliver Williams is an executive director at The Depository Trust & Clearing Corporation (DTCC) and regional head of DTCC’s Global Trade Repository business in Asia.
