Over-the-Counter (OTC) Derivative Primer: Trade Reporting
By John Kiff
G20 leaders agreed in 2009 that all OTC derivative transactions should be reported to trade repositories (TRs). To date, a total of 23 TRs in 13 jurisdictions are either operational or have announced they will be, according to the most recent Financial Stability Board (FSB) Progress Report on Implementation of OTC Derivatives Market Reforms.
Trade reporting has been one of the success stories of the FSB OTC derivative regulatory reform agenda, with all jurisdictions expected to have adopted reporting requirements or at least related requirements by end-2014. In the United States, reporting requirements under Commodity Futures Trading Commission (CFTC) rules were phased in during 2013, and European Union (EU) trade reporting requirements came into force in February 2014.[1] The majority of FSB member jurisdictions have at least one TR available to receive transactions.
However, there have been some rough edges to the implementation of reporting requirements. For example, the scope of the European rules is broader, including both OTC and exchange-traded derivatives. In addition, the U.S. Securities and Exchange Commission (SEC) has not completed its TR rulemaking, so single-name credit derivatives are not yet subject to mandatory reporting requirements in the United States yet.
Also, European rules require that both counterparties have to report trades, creating challenges as to who generates the unique trade identifier (UTI) for each transaction.  In addition, the mechanism for producing legal entity identifiers (LEIs) is still a work in progress, and there is a lack of consistency in how firms are reporting data and TRs collecting it.
Nevertheless, close to 100 percent of gross notional outstanding OTC interest rate and credit derivatives are being reported to trade repositories (TRs). In most jurisdictions where TRs were available, these were available in all asset classes. In fact, in some countries there are multiple TRs for some asset classes – e.g., in the EU there are at least five TRs for each asset class.
However, legal barriers to transaction reporting and to foreign authorities’ access to TR-held data remain a problem.[2] Most barriers to reporting caused by privacy or confidentiality provisions have (or will be) overridden when domestic reporting requirements become effective.[3] However, such overrides become potentially ineffective for cross-border transactions where reporting barriers remain.
For example, Swiss counterparties face heavy fines if a counterparty discloses confidential data without the authorization of the appropriate Swiss authority.[4] Most European and U.S. counterparties who deal with Swiss counterparties are opting to breach domestic TR reporting regulations, rather than foreign privacy laws by “masking” foreign counterparty identities.
Regulators seem to be turning a blind eye towards these breaches of reporting rules, and the CFTC is using no-action letters to provide cover in some situations.[5] Nevertheless, unless more permanent solutions are found, there is a high degree of risk of market fragmentation, plus the data being collected not being very useful to the authorities that it was designed to service.
Similar legal and regulatory barriers thwart some cross border sharing of TR data between national authorities. Until these barriers are removed, TRs will be of limited use financial stability analysis because it will be difficult to impossible to track cross-border interconnections. When cross-border sharing is allowed, it is usually only between regulators, and only regarding transactions by counterparties in their jurisdictions.
On the other hand, the proliferation of TRs plus slow progress on LEIs, UTIs and unique product identifiers (UPIs) will make it difficult to produce an aggregate view of the market. Hence the FSB set up an Aggregation Feasibility Study Group (AFSG) to study the options for aggregating the scattered data. A final feasibility report was published in September 2014.[6]

Footnotes
* The views expressed herein are those of the author and should not be attributed to the International Monetary Fund, its Executive Board, or its management.
[1] More specifically, under CFTC rules, financial counterparties had to start reporting interest rate and credit swap transactions on April 10, 2013, and the rest by August 19. Non-financial counterparties had to start reporting interest rate and credit swap transactions on July 1 and the rest on August 19.  In the EU, reporting requirements for all entities and asset classes cane into force on February 12, 2014.
[2] These include confidentiality provisions, privacy laws, data protection regimes, blocking statutes, bank secrecy laws and indemnification agreement requirements.
[3] For example, the European reporting obligation that came into effect in February 2014 overrides all contractual or any other legislative, regulatory or administrative provision, including privacy laws, professional secrecy or confidentiality requirements in EU member states.
[4] There are similar restrictions for counterparties in China, Singapore and South Korea, and other countries.
[5] The countries covered by the CFTC no-action letter are Algeria, Argentina, Austria, Bahrain, Belgium, China, France, Hungary, India, Luxembourg, Pakistan, Samoa, Singapore, South Korea, Switzerland and Taiwan. However, the relief is only available if the relevant country authorities respond to the letter, and apparently only Singapore has.
[6] The final AFSG report concludes that the preferred options involve the establishment of a central entity that would aggregate, summarize and ensure anonymity of data, and produce standardized reports on a regular basis, down to the jurisdictional and counterparty type level. The centralization could either be physical or logical. However, much work remains to be done before the concept becomes reality (e.g., further work on data element standardization and harmonization, and the completion of work on LEIs, UTIs and UPIs, and nailing down all of the legal, regulatory, governance and technological issues).