A myriad of trade reporting requirements stemming from impending OTC derivatives regulation is set to pose challenges for all market participants and span all asset classes.
Two panels at the Sibos conference in Osaka offered an insight into what to expect across the various regions when it comes to reporting derivatives trades.
The need for trade repositories was accelerated after the confusion that surrounded the near-collapse of US insurer AIG in 2008, prompting the G-20 to call for better data collection that creates a holistic view of potentially dangerous bubbles. Moreover, the on-going sovereign debt crisis in Europe has reinforced the need for readily accessible data.
“The main work on trade repositories will need to be done by the largest 20-30 derivatives dealers, but reporting will affect all types of market participants and the differences between the rules across jurisdictions needs to be looked at,” said Karel Engelen, director and head of technology solutions at the International Swaps and Derivatives Association, during a session entitled, ‘Trade repositories – Tackling new regulatory requirements for OTC derivatives’.
One major concern, noted Engelen, will be dealing with cross-border trades. For example, market participants are still unsure how to report a trade in a German interest rate swap, conducted between a Singaporean and US institution.
Leading the way is the Commodity Futures and Trading Commission, the US regulator that has oversight for index-based swaps, with reporting for credit derivatives and interest rate swaps launched on 12 October, with other asset classes set to follow in January. Japan, Singapore, Hong Kong and Australia are preparing their respective trade reporting rules for introduction during the course of 2013.
A key difference between US and Europe, which is reforming swaps trading via the European market infrastructure regulation, is a requirement by the latter to report listed, as well as over-the-counter, trades.
Europe is expected to start reporting derivatives trades by 1 July 2013, and Jesús Benito, managing director of REGIS-TR, a European trade repository formed through a joint venture of central securities depositories Iberclear and Clearstream, said testing of his facility would begin within two weeks.
He added REGIS-TR was looking for value-added services to further help the market prepare for the new rules.
“Swaps traders, clearing houses, trade repositories and trading venues will all require a complex network of connections to each other,” he said. “There is room to innovate and offer new solutions that will help to ease this burden.”
All for one, or one for all?
A second panel, Trade repositories: global versus local’, looked at the disparities and uncertainties between the approaches taken by different jurisdictions and the challenges this presents for market participants as they await clarity on where and how to report their positions.
Speakers raised concerns that the global nature of the derivatives market means fragmentation of trade repositories may in fact add to the opacity regulators are attempting to solve.
“Different rules for trade repositories will make it difficult for large firms that operate across jurisdictions to co-ordinate their approach to reporting,” said Satoru Imabayashi, head of market planning, Mizuho Corporate Bank.
But Esmond Lee, executive director at the Hong Kong Monetary Authority’s (HKMA) financial infrastructure department, said establishing trade repositories would likely be a key requirement for financial hubs.
“The G-20 mandate requires both cleared and uncleared OTC derivatives to be reported, which will lead to the introduction of new products after the regulations are introduced,” he said, citing the development of RMB-denominated financial instruments in Hong Kong. “Having a home-grown view of positions will also help with local market surveillance.”
Connections between reporting facilities was recognised by panellists as a vital factor that would ease the burden on the industry.
The HKMA is already taking steps to link its repository with that of the Depository Trust and Clearing Corporation (DTCC), enabling market participants to automatically report to the HKMA via DTCC.
“Interoperability between trade repositories is a big issue and one that has been recognised by the legislation underpinning the new derivatives rules,” noted Marisol Collazo, managing director, product management, DTCC.
One issue arising from the sharing of trade information across borders is the need for confidentiality. But Franco Passacantando, managing director, Banca d'Italia, said matters relating to the security of data – including anonymity, maximum time periods for how long data can be stored and limiting certain information to regulators only – were firmly on the radar.
“We are entering a new world of data collection, but there should be no strains when it comes to sharing information,” he said.
The panel also discussed how the use of trade repositories could be broadened in future, specifically related to the mark-to-market valuations needed for the movement of collateral and pricing of derivatives.
“There is scope for trade repositories to go further in their roles as neutral third-parties to help regulators achieve their goal of minimising systemic risk,” said Lee.