All companies, large and small, financial or non-financial will soon be required to report all OTC derivative transactions they do to trade repositories, most likely by the end of next year. Frances Maguire reports.
Regulation has been drafted by the European Council as well as the European Parliament and an agreed European regulation for reporting for all OTC trades is expected by the end of 2011, although there is a slight risk of a delay to until the first quarter of 2012.
Trade reporting for the opaque over the counter derivatives market has arisen because in the immediate aftermath of the collapse of Lehman Brothers there was very little information available to regulators and market participants on large exposures and a better audit trail was needed. As not all OTC trades will be centrally cleared, trade repositories are being established as an independent source of information to regulators, and it is understood that both cleared and uncleared trades will be reported through these new market infrastructures.
Thilo Derenbach, Deputy Managing Director of REGIS-TR, the European trade repository co-founded by Clearstream Bank and the Spanish CSD, Iberclear, is in little doubt that even though the final rules have not been presented, time for compliance is short. Compliance to report OTC transactions is likely from 1 January 2013 and Derenbach believes firms need to start taking their decisions on future infrastructures to connect to, be they CCPs, TRs or matching platforms, building their infrastructures, mapping and back-loading live data from in-house systems to a trade repository.
Unveiled at last year’s Sibos, REGIS-TR began operating a trade repository for interest rate derivatives last December. He says: “Trade reporting will be required from all firms and the feedback we have received is very diverse, particularly because we have large dealers, mid-sized financial companies and big and small corporates acting in this filed, and they all have very different needs and different pain points in respect to this regulation. A mid-sized corporate has much lesser degree of automation, in terms of processing OTC derivatives, than a large financial institution and they have little or no experience in relations to clearing houses.”
He believes that particularly smaller financials as well as corporates are in need of a flexible solution that can offer them direct access to a trade repository, allowing for direct electronic matching of transactions within the TR to speed up the processing of OTC derivatives. “We are trying to provide service for all – from the large broker dealer to the small corporate.”
Since December, the scope of covered interest derivatives has been increased and the repository is capturing matched and unmatched trades across all sub-groups of the interest derivative product range for its small group of buy and sell-side pilot customers. FX and currency derivatives, which together with interest rate derivatives represent more than 80 per cent of firms’ total transactions, will be added to the repository by the year end. Once FX swaps, forwards and options have been added to the system, it is intended to have equities and commodities ready by March 2012 and credit default swaps quarter of 2012, before the regulation materialises in Europe.
He says: “It was important to have both sell and buyside clients onboard to validate our concept and the FX trade repository service has been validated with our pilot firms in addition to many other participants that have shown interest in using REGIS-TR but wanted to see our FX trade repository rolled out before they will sign up.”
REGIS-TR intends to be a global trade repository with a clear European footprint and will apply to be a trade repository in Europe as well as a swap data repository in the US, following its review of the Dodd- Frank Wall Street Reform and Consumer Protection Act published last month. “We are very satisfied with the proposed rules and so far comply with both European and US regulations,” adds Derenbach.
He believes there will be very few, less than five, global providers of trade repositories, and then a number of national domestic and perhaps two to three regional depositories. Hong Kong and Taiwan have already indicated intentions to build trade repositories, and other regions are in discussions to use the REGIS-TR system instead of building their own TR. “I know of six markets that want to set up their own national domestic trade repositories, and we all know of two markets that have already started doing so, so the end number of national repositories is likely to exceed ten.”
It is expected that the clearing houses will forward cleared transactions to the trade repositories. Transactions cannot be reported directly from a clearing house to a regulator; they have to be reported through a trade repository in the current format of the regulation, unless clearing houses decide to set up their own trade repositories. “Onward reporting of cleared transactions by clearing houses to trade repositories would be the most efficient approach. Anything else would further increase the cost base for the participants.”
In terms of collateral management, REGIS-TR has a concept for exposure management, linked to a collateral management service provided by one of its shareholders, Clearstream Bank. The combination of exposure management and collateral management services could help to reduce capital requirements. Says Derenbach: “Allowing market participants to access their existing securities collateral pool at Clearstream Bank, will give them a more flexible way to manage their OTC derivative exposures in the future. Using the automated collateral management service of Clearstream Banking provides an alternative to bilaterally processed and monitored exposure coverage as it happens today. This is one of the key drivers for REGIS-TR to facilitate the access to that international securities collateral pool.
“We are allowing customers to utilise their collateral pool for a new exposure type – OTC derivatives. This unique link will make REGIS-TR an even more attractive choice for trade reporting.”
Today, the industry has repositories for three OTC derivatives asset classes. The Depository Trust & Clearing Corporation (DTCC) Deriv/SERV’s Trade Information Warehouse houses credit default swaps, while also providing asset serving and central settlement capabilities and in July, DTCC joined forces with MarkitSERV to launch an OTC Equity Derivatives Trade Reporting Repository. This new repository enabled the major market participants to meet a commitment made to the New York Federal Reserve and other international regulators to have all OTC equity derivatives in a repository by 31 July 2010. DTCC will join forces with Swift to build a FX trade repository solution. Tri-Optima’s OTC Interest Rate Derivatives Trade Reporting Repository went live in December 2009 and began submitting data reports to regulators in January 2010, however it is understood that the Rates Steering Committee of International Swaps and Derivatives Association (ISDA) has decided to allocate the trade repository to DTCC, as it has also done for commodities.
It is expected that other organisations will join the fray and offer trade reporting services. The Chicago Mercantile Exchange (CME Group) and the Intercontinental Exchange (ICE) have indicated this. ICE plans to roll out a commodity derivatives repository as a new part of its existing e-confirmation service, ICE Trade Vault, and CME Group intends to offer trade reporting in at least some of the products it clears, currently commodity, interest rate, foreign exchange options and credit products.
Furthermore, the rules in Europe for trade repositories are not final. There are still discussions ongoing about the European Market Infrastructure Regulation (EMIR), which will come into force in 2012.