Regulation Reflections: US Reporting – Is systemic risk being de-prioritized?
It is clear CFTC does not yet have meaningful systemic risk information from the end of day / historic SDR reporting which has been live for several months. As well as tackling a very large big data project which is unfunded, CFTC needs to change the reporting rules so that reporting obligations are better split across various service providers to drive much more efficient data collection, transformation and aggregation.
It is clear CFTC does not yet have meaningful systemic risk information from the end of day / historic SDR reporting which has been live for several months. The real-time trade data we can see in SDRs are of some use from a volume and price perspective but don't give any clue to systemic risk which can only be revealed based on the aggregate end of day / historical data which is not public. On that aspect there is no news from CFTC (that I am aware of) but some discouraging signs:
- Even a single participant entity and asset class is fragmented across SDRs (some CCPs insist on being the official version, others allow a specialist SDR to be it for cleared trades)
- The metrics associated with trades reported seem limited to notionals and NPVs – without even basic risk metrics and collateral balance
- Commissioner O'Malia's scathing early statement on the usability of the data gave an impression that processing the information was an afterthought – at least at the time.
- The CFTC has been refused an increase in IT budget by congress
So it's unclear:
- How much participants are verifying accuracy / completeness of the multiple SDR subsets of information about their portfolios
- Whether complete, consistent counterparty legal entity ids and hierarchy and product ids and hierarchy are in place centrally
- Whether an effort is going on to collect from SDRs, map together, aggregate by entity and asset class and maybe calculate risk metrics
Systemic risk ought to be a top priority because it is what turns an isolated problem into a full blown systemic crisis. Transparency, investor protection, leveling the playing field, opening up access and other objectives may be worthy enough but if they are distracting from tackling systemic risk that would be a problem. As Prof Gary Gorton opines in the interview published on the minneapolis fed website in 2010:
"It’s not that other things are unimportant. But we haven’t had trouble with the other things in the sense of a global financial crisis. If you had brokers cheating people, predatory lending, declines in underwriting standards, or you don’t like credit derivatives or something, whatever it is, those things per se are not a global financial crisis. And it’s the global financial crisis that is the first-order effect to be dealt with."
It's worth noting that during the 2008 the Fed reportedly obtained pretty complete information on CDS exposures of / to Lehman and AIG from the old DTCC Trade Information Warehouse for Credit Default Swaps. Now the information even about CDS is fragmented across SDRs, legal entities and reg jurisdictions. I set out in the section at the end some brief thoughts on things that may help improve things. This may be one of those times when it is easy to make simple suggestions from the outside which become hard to implement on detailed consideration. On the other hand without a similar recipe, it is hard to imagine regulators being in possession of worthwhile systemic risk information for several months or years. Clearly this is no small undertaking and it may indeed be happening in the background. If not or it's several years away, this would speak to a lack of prioritization of tackling systemic risk over other aspects of Dodd-Frank. While we wait in hope, does anyone have specific information speaking to when CFTC will have for its own use a meaningful quantification of systemic risk?
Untying the reporting gordian knot
- Set an objective / rule that complete market risk and counterparty risk information for each legal entity is met by a single SDR per asset class chosen by each participant / parent group (multiple asset classes could be allowed in a single SDR if they choose). Sometimes two parties to a single trade would chose different repositories resulting in two copies of the trade one in each. That is ok as it doesn't break the goal of complete market risk and counterparty risk profile of each legal entity / asset class in one SDR.
- Mandate CCPs for cleared trades, and dealers for bilateral trades to respect those choices and send on behalf of participants (and themselves) to the respective nominated SDR
- Clarify that SEFs may have a role in real time reporting and end of day settlement prices but rely on CCPs (and dealers for any uncleared trades on SEFs) for end of day / historical reporting.
- Make all participants responsible for verifying accuracy and completeness of their portfolio at their chosen SDR (e.g. through portfolio reconciliation in house or provided by a third party utility) and for providing portfolio sensitivities at trade level (e.g. from their own systems or again delegated to a third party utility) and for providing CSA netting set definitions (sets of products and counterparty entities (or if needed trades if too complex to parametrize))