OTC trade repository plan faces hurdles

Financial authorities in the US and Europe have advocated the introduction of a central trade repository to gather data on the over-the-counter (OTC) derivatives market, but there is concern that multiple repositories could do more harm than good.

In its May 13 statement on regulatory reform of OTC derivatives, the US Treasury said it wanted all trades not cleared through central counterparties (CCPs) to be reported to a regulated trade repository - a plan already being addressed by the Federal Reserve Bank of New York.

"We are working on the concept of central trade repositories," said Theo Lubke, senior vice-president in the operational risk department of the New York Fed's Bank Supervision Group. "Regulators need to see more data on OTC derivatives trades, including when the trades took place and the value of the trades."

Meanwhile, in Europe, the Committee of European Securities Regulators is carrying out a feasibility study on how a trade repository, or 'risk map', might work. A high-level working group proposed such a risk map in a report presented to the European Commission earlier this year, explaining it should contain all the trade information needed to allow supervisors to identify systemic risks on a global scale.

But there are concerns that separate facilities in Europe and the US would risk missing the bigger picture, as trades might be reported to multiple repositories or left unreported. "If a central trade repository is bound by institutional or national boundaries, it will probably miss the bigger problems," said Andrew Haldane, executive director of financial stability at the Bank of England.

Another concern is that it will be difficult for a repository to gather all of the trade information from across the derivatives market, given the huge number of participants and the low levels of automation. One existing trade repository - the Depository Trust & Clearing Corporation's trade information warehouse - collects data on credit default swaps (CDS) only, a market that is characterised by a small number of participants and a high level of automation.

"The CDS market has been the easier part of the derivatives world to feed into a trade repository, partly because it's a newer market and there aren't so many legacy systems around so it's been easier to get automation in place," said Richard Metcalfe, head of policy at the International Swaps & Derivatives Association.

Architects of any repository will also have to determine which institutions would be mandated to supply trade data. Many have suggested it shouldn't apply to banks only, as that would risk missing systemic problems relating to insurance companies and hedge funds. But the inclusion of other entities will require the co-operation of regulators across not just geographical, but also sector lines.

Despite the hurdles that will need to be cleared, regulators and policy-makers are pushing ahead with moves towards a central repository. "There is definitely a recognition among regulators and central banks that we need a new macro-prudential apparatus to address systemic risk," said Haldane. "The failings in this crisis have been mainly informational ones, so a central trade repository would be an important safeguard for next time."