DTCC’s Oliver Williams explores the use cases of enhanced trade repository data, as Asia’s regulators and institutions seek even greater transparency of OTC derivatives markets.
In 2009, the world watched as G20 Leaders convened in Pittsburgh to identify ways to prevent a repeat of the events that led to the global financial crisis. A key area of focus was, naturally, OTC (over-the-counter) derivative trading. At the time of the crisis, the opaque world of OTC derivatives had generated an estimated USD 684 trillion of notional value in open contracts and was widely seen as a contributing factor in the crisis that followed the collapse of several significant derivative position holders.
The outcome of those G20 discussions was a multi-faceted plan to reform the way derivative markets were regulated, through increased transparency via trade reporting, tighter margining requirements and broader reaching trading venue and clearing requirements. Ultimately, the reforms sought to increase transparency and encourage strong and stable financial markets, and in doing so, prevent a repeat of 2008. At the time, along with G20 nations, Singapore also made commitments to implement these reforms.
Since then, regulators around the world, including the MAS (Monetary Authority of Singapore), have broadly implemented these reforms, but at different paces and in different ways. Specifically, there has been wide adoption of new requirements around the margining of non-centrally cleared OTC derivatives; mandatory clearing of OTC derivatives; and reporting of OTC derivatives transactions to regulators via licensed trade repositories.
This October saw the MAS extend its trade reporting requirements for OTC derivatives contracts to include commodity and equity transactions booked and/or traded in Singapore. This was in addition to the credit, interest rate and foreign exchange asset classes which already fall under the regime. With this addition, Singapore regulators have aligned its reporting requirements with other countries in the APAC region such as Australia and Hong Kong.
The next phase of amendments to MAS reporting rules, scheduled for October 2019, will see existing reporting requirements extended to additional market participants, based on factors such as the type of licence they hold and the size of their derivatives book. These actions are part of the MAS’ ongoing efforts to complete the rollout of their reforms and, in doing so, increase transparency and reduce risk.
The MAS have taken a considered and practical approach to their reforms, eschewing a “big bang” implementation in favour of a fast follower approach which has allowed them, through consultation, to adopt best practices as they evolve over time. This is not unique to the MAS – both Australian and Hong Kong regulators have taken a similar approach. The HKMA (Hong Kong Monetary Authority) recently cited the five-fold increase in regulatory overheads that the industry has been dealing with since 2008 as a key factor in its approach to further evolving the design and application of regulation.
This is driving an increased focus by regulators on evolving technology solutions that can be harnessed to increase the value of data collected and reduce the complexity involved in its collection and analysis. The HKMA has specifically called out the need to explore machine readable formats, not only for consuming standardised rule sets, but also for reporting the resultant data.
Similarly, the MAS has been increasingly focused on technology solutions to support future plans to create a data-driven approach to regulation. A recent agreement between ASIC (the Australian Securities and Investments Commission) and the US CFTC (Commodity Futures Trading Commission) to collaborate on fintech is an indicator that regulators are increasingly focused on exploring ways to use technology to further the regulatory outcomes they are pursuing. Trade reporting is very much a part of this.
At the same time, it is broadly recognised that if the technologies being pursued are to result in improved outcomes, underlying problems around inconsistent data standards and definitions need to be addressed. To this end, repository providers, the regulatory community and industry associations are working together to develop data standards to drive consistency in trade reporting data sets. The harmonisation of data standards, definitions and formats as well as reporting rules is a critical next step if trade repositories are to provide data in a manner that better supports systemic analysis, in turn allowing greater insight into systemic risk.
Today we already see good examples of regulators analysing and considering local market behaviour by leveraging trade repository data. In June 2018, the RBA (Reserve Bank of Australia) published a report outlining the insights it has gained as a result of the data. Among other things, the report summarised key market trends, such as how the notional value outstanding for various products have changed over time. It also provided insights into how Australian banks use OTC interest rate derivatives, as well as the range of maturities traded among single-currency interest rate swaps.
This information was sourced directly from the trade reporting information that regulators receive from repository providers today, like DTCC (the Depository Trust & Clearing Corporation). More than being a simple commentary, the insights gleaned can help regulators understand their data better and potentially inform policy-type decisions. An improvement in and harmonisation of data standards will only serve to further these use cases.
In addition to these insights, trade repositories also have the potential to add value beyond what was initially envisioned following the G20 summit. One potential use could be borrowed from the credit derivatives space. The credit-default swap market demonstrates a proven model for establishing a single trade record store, serving as a warehouse to collect and maintain “golden source” records for all global credit derivatives transactions. The achievement of a similar model covering all asset classes is another key driver for the standardisation and harmonisation efforts that are currently underway – the more standardised and harmonised the data set, the more useful.
Another key use case for further utilisation of trade reporting data relates to repurposing the data currently collected to meet other obligations. In Singapore, for instance, the MAS is reviewing whether it can reuse some of the information in the trade repository to reduce reporting requirements under prudential reporting rules and minimise duplication as a result. The MAS is already gathering feedback from the industry on how repository data could be used to reduce some of these reporting requirements.
Another use case being explored involves returning the collected data to the original submitter, either in its “golden source” format for use in reconciliation or risk management, or in an aggregated way for other purposes. For example, trade reporting data could be used to help banks comply with FRTB (the Fundamental Review of the Trading Book) regulation that will take effect in 2022. Data collected by repositories could, in theory, be returned to banks to be used to deliver “real” price observation data to meet regulatory obligations requiring them to demonstrate the ability to model risk factors.
The path started by the G20 political leaders in September 2009 continues to evolve. The new MAS reporting requirements that went live in October are a continuation of a global journey to bring transparency and reduced risk to the OTC derivatives markets. The implementation of MAS’ new regulations and its alignment with other major regional markets such as Australia and Hong Kong are important steps towards bringing even more transparency to the markets.
At the same time, as trade repository service providers continue to discover innovative ways to deliver increased value from repository data, and as data standards and harmonisation efforts continue, the benefits of trade repositories are only expected to grow.
Oliver Williams is Executive Director and a Regional Head of DTCC’s Global Trade Repository business for Asia.