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June 25, 2013

The OTC Space Leads the Way | FSB to consider One Repository to Rule Them All

In a tribute to an idea first raised on this very website on April 1st this year, the FSB has agreed:

… that global aggregation of trade repository data is essential to enable comprehensive monitoring of risks to financial stability, and launched a feasibility study of options for how information from trade repositories can be aggregated and shared among authorities. The results of the study will be published in the first half of 2014.

The source for the quote above is on page 2 of this press release: http://www.financialstabilityboard.org/press/pr_130625.pdf For evidence that this website suggested this very same strategy prior to the FSB making this announcement:

  1. Article 1: http://www.ftseglobalmarkets.com/issues/issue-70-may-june-2013/one-repository-to-rule-them-all.html published in the May/June issue of FTSE Global Markets
  2. Article 2 (below) published on April 1st as a spoof, but in reality a serious proposition to bring the data together. The FSB made contact following the April 1st post to ask nicely for the joke to be removed, but in a sanitised form and now under my own banner, the same ideas made a little more sensible:

Unified Global Trade Reporting Strategy

Background In September 2009, G20 Leaders agreed in Pittsburgh that: All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end- 2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements. We ask the FSB and its relevant members to assess regularly implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.  The FSB has monitored progress towards these goals in a series of progress reports, the most recent being in October 2012. Much progress has been made to bring greater safety to the OTC derivatives markets, one area of focus is the goal of providing national regulators with data on the trading activity of OTC products for banks under their prudential regulation. Since 2009 activity by commercial entities to provide services to meet the wider G20 goals has been positive. In the US mandatory clearing of OTC products has begun, and in many countries new Clearing Houses and Trade Repositories have been created or are being built. Trade Reporting Goals One of the barriers to effective monitoring and regulation of the OTC derivatives market for regulatory bodies has been availability of detailed data on a trade by trade basis, for Global Systemically Important Financial Institutions. Credit must go to the authorities in Brazil for designing and implementing requirements for OTC products to be publicly reported since 1994, showing considerable foresight. The requirement to report OTC derivatives is intended to achieve certain goals, these include:

  • Enabling a national regulator to receive a coherent and integral set of trade data which can provably represent a banks entire stock of OTC derivatives trades
  • By using this data enable a national regulator to analyse the exposures, sensitivities and risks within a portfolio of OTC derivatives
  • Proactively work with a G-SIFI to understand and manage their OTC derivatives portfolio to avoid negative outcomes
  • Provide regulators on a national, regional or global basis with the data required to judge which OTC products are suitable for central counterparty clearing
  • Lead towards a central reference calculation of the capital requirements for a G-SIFI, to be compared with each firms own calculations
  • Enable a feasibility study into the creation of single global central counterparty, to bring the maximum level of protection through multi-lateral netting of exposures

Unexpected outcomes Whilst the enthusiasm with which providers of Trade Repositories around the world have taken up this new challenge is to be welcomed, the practical implications of the current approach may lead to a sub-optimal solution based on the goals above. Problems include:

  • Inconsistent data formats across services
  • Inconsistent data formats between banks within each individual service
  • Split data sets across multiple repository services
  • Inconsistent or complex rules about the obligation to report, involving single or double sided submission
  • Inconsistent data scope requirements including or excluding exchange traded products
  • Duplicated reporting across national or global services due to un-harmonised regulatory requirements
  • Barriers to access to the collected data via national legal and regulatory controls, counter to the intention of data sharing between regulators, and other global parties such as the World Bank and IMF

All of these issues will likely prevent the goals set out for the G20 commitment being achieved in large or small part any time in the near future. Recent comments by Commissioner Scott O’Malia of the CFTC regarding the technical problems at the CFTC give support to this analysis. A new approach One of the key concerns has been that commercial interests in delivering trade reporting services may not be fully aligned with the goals above, and that the purposes of providing such a service should be to deliver a ‘common good’ rather than for any general economic gain. Strategy It is recognised that whilst G-SIFIs are familiar with complex technology projects, the gathering and management of large amounts of data are something which non-banking organisations have a strong track record of. Firms like Walmart in the US and Tesco in the UK operate data stores of billions of customer transactions, and use advanced analytics to make decisions on how to run their stores to maximise profits. Not forgetting Facebook which now supports over one billion users around the world – it shows that large data sets are both possible and achievable with current technology, so the banking industry should learn from non-banking organisations. The key changes in the implementation of Trade Repositories might involve the following steps:

  • The appointment of a single global design authority, set with clear goals for outcomes, accountable to the FSB
  • An independent project control organisation set the goal of managing the constraints for the project including time, cost and quality of the end solution
  • Design of a single global Very Large Trade Repository (VLTR) including data formats, hardware, software, data privacy and security, and a communications infrastructure
  • A competitive tendering process for the build phase, open to organisations with a track record of managing large data sets
  • The implementation and testing of the new Very Large Trade Repository (VLTR)
  • A migration strategy to transfer the existing data sets in the multiplicity of existing Swap Data Repositories and Trade Repositories
  • A new global legal and regulatory framework to harmonise access to the data in the VLTR
  • Clear goals for the derived purpose of the Unified Trade Repository, based on the goals articulated above, feeding back into the design, build and test phases
  • Commitment by the G20 Governments to support the project, both financially and with enabling legislation
  • Appointment of a research team to begin using the new data set to replicate banks own analytics and validate the value of the data collected

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