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November 15, 2013

TR competition questioned by TRs | Mondo Visione Exchange Forum

TRs expect minimal competition benefits for clients.  As reported by the Trade news (tiered subs.), trade repositories (TRs) publicly questioned their own economic model at the Mondo Visione Exchange Forum.  Unavista said competition has at least put price pressure on TRs which has already helped clients pay less.  However, the EMIR regulations intend TRs to be "at-cost" utilities according to DTCC who think there are likely to be four or less TRs in future (given lack of market wide revenue to support more profitable TRs than that).  CME said that TR competition is "not particularly useful for clients".

TRs might have added "or for regulators".   Whilst regulators have made rules on Trade Repositories in the EU and Swap Data Repositories in the US, they did not effectively design an embedded structure in the new reporting industry created to promote for ease of data collection and aggregation even at one asset class or one parent counterparty level.  As a result TR / SDR competition has created a fragmented industry wide picture.  Gathering trade data, mapping together product and counterparty hierarchies and calculating and aggregating risk metrics across multiple TRs and SDRs is likely to put many months or years between regulators and meaningful systemic risk aggregates.   Arguably this was job one after the crisis and it still seems many years away.  

Is deep competition the only way?  No.  Financial markets have a rich history of competition but also a rich history of market utilities which are either legislated monopolies or monopolies tolerated by competition authorities.  Examples include: Central banks (e.g. the Federal Reserve), national CSDs (e.g. DTCC), national payment systems.  Legislative instincts are unlikely however to sanction a legislated monopoly in either the EU or the US.   Given TRs themselves are signalling a highly concentrated oligopoly as the outcome, it would though surely be best if that was reached as soon as possible, so regulators can get their systemic risk information and participants can lower there costs.

How to make faster progress?  Fix the overall operating model.  Financial markets have a rich history of projects where a simple vision was turned into very complex detailed design which ultimately failed for lack of a clearly thought through overall operating model.   Few have been so large scale as swap reporting.   Some initial thoughts on how to round out the swap reporting operating model to mitigate the confusion caused by competive fragmentation of TRs / SDRs are at my earlier post Regulation Reflections: US Reporting – Is systemic risk being de-prioritized?



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