A recent speech by Benoit Coeuré, a member of the ECB Board of Executives, sheds some light on a key issue in the OTC derivatives markets: regulatory transparency.
It’s an issue on which ISDA and market participants have spent a lot of time and resources – largely to good effect, as the trade repositories we helped establish gave policymakers a clear view of risk in the system.
Recent developments, though, threaten to undermine progress that has been made.
Mr. Coeuré asks an important question about transparency in his speech: “Does…the supervisor responsible for the supervision of a large cross-border financial institution at a consolidated level have direct and immediate access to information on OTC derivatives transaction that encompass all transactions entered into by all entities of this group? Is the information accessible, in other words can it be easily aggregated across trade repositories and jurisdictions?”
He then goes on to say: “My answer would be a clear no!”
And we agree.
Mr. Coeuré went on to discuss privacy laws, blocking statutes and indemnification clauses in several jurisdictions which restrict access to the detail of OTC derivatives transactions; the inability to aggregate data across trade repositories and jurisdictions; and differences in the type and level of information required for reports across jurisdictions. He ultimately broke the problem into three main issues: information gaps, data fragmentation across trade repositories and jurisdictions and obstacles impeding authorities’ access to data.
As the ECB official points out, the Financial Stability Board, assisted by the CPSS and IOSCO, has only very recently begun a feasibility study on various approaches to address shortcomings in the global regulatory reporting landscape (a global repository aggregator being one approach).
These problems were predictable, and were predicted. The OTC derivatives market has been a global one from its inception. The only way to capture this activity is single centralized trade repositories by asset class. Proliferation of trade repositories – within different regions and globally – leads to fragmentation and possible duplication of the information gathered. As such it undermines the very efforts of the regulators to capture and comprehend the risk exposures that market participants want to provide and that regulators want to get.
We believe there is a lesson here. Regulators will have heard ISDA and various market participants ask “What is it you want to achieve?” when addressing regulatory proposals and wishes. This is not a rhetorical question. Regulatory (or quasi-regulatory) processes where there is a real, interactive debate with industry and other interested parties – such as those which first enabled development of trade repositories – are healthy, and achieve results. They create shared understanding of regulators’ goals, and help everyone to build towards them.
There’s still a lot of work to be done on derivatives regulation – on global reporting taxonomy, for example (which must involve an open and interactive dialogue between regulators and industry). We want to solve these problems too, and want to be able to help regulators to do so.