A provision of the Dodd-Frank Act requires indemnification agreements from foreign regulators for trade repositories based in the U.S. to provide them with data on the over-the-counter derivatives market. Depository Trust & Clearing, which operates the global trade repository for credit default swaps, has voiced concerns that this provision will cause fragmentation of market data. Below is an edited question-and-answer session with DTCC Managing Director Pete Axilrod in which he discusses potential effects of the requirement and what DTCC sees as the best resolution of this issue.
How would this change [requiring the indemnification agreements] differ from the current system, and what problems do you foresee?
Today, there’s a single global repository [Trade Information Warehouse] for credit derivatives with very high-quality data. It has data for 98% of all credit derivatives. [Its data also serves as the foundation for central payment and credit event processing for the industry, which ensures that the data is highly accurate.] The firms are motivated to have the correct information in the repository because they’re going to be financially affected by the information that’s there and how we process things.
Today, between 30 and 40 regulators have direct online access to this data. The portal has very robust entitlement programs, so the regulators see only data in which they have a material interest. Our entitlements are essentially as agreed between members of the OTC Derivatives Regulators’ Forum, comprising regulators in all of what you’d think of as the major jurisdictions.
About a year and a half ago [in a letter fully and formally approved by all 44 members of the forum], we were provided voluntary guidance on who should have access and why. [The provisions of this guidance have been formally adopted by Deriv/SERV.] Essentially, that says if a governmental authority has a material interest in the contract information, they can see the contract.
One of the things that generally handcuffs regulators and roils the market in times of crisis is when people don’t understand what relevant market exposures are and what the consequences in the derivatives market are going to be [of the actions they may take in restructuring debt or buying back debt, etc.]. It also tends to drive unwarranted and unhelpful speculation in the markets, and people may take actions that may tend to exacerbate the crisis.
If global market information were fragmented, you might have double counting, and all of a sudden you’ve introduced a note of uncertainty into the process. Also, you’ve introduced a note of uncertainty into the marketplace. Any kind of fragmentation of the data gives rise to uncertainty.
Complete and accurate information just needs to be at the fingertips of the regulators and the public. The risk is that under the indemnification of Dodd-Frank, a registered swaps repository in the U.S. generally will be prohibited from exchanging information with non-U.S. authorities unless they obtain an indemnification agreement from the non-U.S. authority.
The Securities and Exchange Commission and Commodity Futures Trading Commission are examining the issue, and they understand along with us that getting regulators worldwide the information they need to deal with these sorts of crises is important. They’re trying to come up with the framework that will allow that to happen.
In the best of all possible worlds, the regulators would all agree that the world should continue the way it is, at least as it relates to trade reporting in the global credit derivative market, and other asset classes would then come up to the same standard.
What is DTCC doing in regards to this issue?
I think it’s important for the safety and soundness — and I can’t overstate this — with all the concern around sovereign debt and, beyond that, to banking debt, it is critical for the safety and soundness not only of the markets but of the economy globally that complete and accurate market exposure data continue to be at the fingertips of all of the relevant authorities and that market participants have an accurate view of aggregate market exposure information. If this means we have to move the data to a non-U.S. entity, [that’s what we’ll do]. That must be maintained.