The Depository Trust & Clearing Corporation (DTCC) has testified before a House Agriculture Subcommittee in support of bipartisan legislation to ensure regulators around the world continue to share global swaps data to maintain the highest degree of transparency into over-the-counter (OTC) derivatives markets.
The legislation was approved by the House Financial Services Committee yesterday by voice vote.
Michael Bodson (pictured), DTCC’s Chief Operating Officer, told the House General Farm Commodities and Risk Management Subcommittee that passage of the The Swap Data Information Sharing Act (H.R. 4235) is critical to prevent fragmentation of swaps data, which could undermine the ability of regulators to obtain a comprehensive view of market data and frustrate market surveillance and oversight. DTCC operates the Trade Information Warehouse for credit default swap (CDS), which holds more than 98% of all CDS trades globally.
The legislation calls for removing the indemnification provisions from the Dodd-Frank Act, which require US-based swap data repositories (SDR) to receive a written indemnification agreement from non-US regulators before sharing critical market data with them. These regulators have said they would be unable or unwilling to provide an indemnity agreement because the concept is unfamiliar to them and inconsistent with their traditions and legal structures.
“This bill would send a strong message to the international community that the United States is strongly committed to global data sharing and determined to avoid fragmenting the current global data set for OTC derivatives,” Bodson says. “If a regulator can only “see” data from the SDR in its jurisdiction, then that regulator cannot get a fully aggregated and netted position of the entire market as a whole. In short, regulators will be blind to market conditions as a direct result of the indemnification provision.”
Bodson stressed in his testimony that indemnification is one of two technical issues (the other is known as “plenary access”) that Congress needs to address to prevent data fragmentation. Dodd-Frank gives US regulators “direct electronic access” to data held by an SDR. This provision was intended to ensure immediate access to swap data in machine readable form. However, non-US regulators are concerned that “direct electronic access” may be interpreted too broadly by the US agencies to gain plenary access to all swap data they hold – including data for transactions with no identifiable nexus to US regulation.
“This is unworkable because the scope of an SDR can be broader than just US data – and regulators should have access to only that data in which they have a material interest,” Bodson says. “DTCC fully supports regulators having plenary access for SDR supervision activities related to the operation of the SDR and transactions held within it with a US nexus. However, we oppose plenary access for other purposes because non-US financial firms executing transactions without a US nexus will avoid reporting their trade data to a global repository if that data could become subject to US regulatory access.
Bodson noted that if data fragmentation occurs, regulators, including the SEC, CFTC and the Office of Financial Research would face the daunting and time-consuming challenge of having to aggregate data from multiple repositories for purposes of market oversight and systemic risk mitigation.
Bodson illustrated the combined impact of indemnification and plenary access using the example of two British banks executing an interest rate swap in the UK involving a Sterling reference rate. Under the plenary access provision, if the trade was reported to a UK-based but US-registered repository, US regulators could claim a legal right to view data on this transaction – even though the US regulator has no material interest in it. To compound the situation, the indemnification provision would require the British regulator to indemnify the US-registered repository in order to access this same data – despite the fact that the entirety of the trade falls within the British regulator’s jurisdiction.
Under current international guidelines established by more than 40 regulators under the auspices of the OTC Derivatives Regulators’ Forum (ODRF), supervisors are authorised to access data where there is a nexus to the jurisdiction or entity. US regulators can view data where there is a US nexus and British regulators can view data with a UK nexus.
Bodson urged the Committee to amend the legislation to include clarifying language stating that regulators have access to data in which the regulator has a material interest.