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CPSS & IOSCO Publish Requirements for OTC Derivatives Data Reporting and Aggregation

Friday, January 20, 2012

Christopher Bernard | Bloomberg LawReport on OTC derivatives data reporting and aggregation requirements – CPSS-IOSCO Final Report of Jan. 2012 On 17 January, a task force (Task Force) consisting of the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) published a final report (Final Report) regarding the collection, storage, and dissemination of over-the-counter (OTC) derivatives transaction data by trade repositories (TRs). The Task Force believes that the central collection of accurate and timely data by TRs would promote transparency and financial stability and help prevent market abuse. The Final Report reflects comments received on a consultative version of the report (Consultative Report) that was published in August 20111 as well as recent work on the development of a global legal entity identifier (LEI) as a tool for aggregating data.

Background

A trade repository is a centralised registry that maintains an electronic database of OTC derivatives transaction records, including centrally cleared and non-centrally cleared trades. Aggregated information can be used by authorities to assess systemic risk and financial stability, conduct market surveillance and enforcement, supervise market participants, and carry out resolutions in the event of counterparty failure, as well as provide a source of information for market participants and the public. In September 2009, the leaders of the G-20 nations announced a number of initiatives in response to the financial crisis, including a commitment that OTC derivatives contracts should be reported to TRs as part of a larger effort to strengthen the global financial system.2 The Financial Stability Board (FSB) published a report in October 2010 containing recommendations of a working group led by representatives of the CPSS, IOSCO, and the European Commission regarding the implementation of the G-20's objectives, including a recommendation that the CPSS and IOSCO develop (1) minimum data reporting requirements and standardised formats and (2) the methodology and mechanics for the aggregation of data on a global basis in order to provide regulators with a comprehensive overview of the market.3 IOSCO formed the Task Force with the CPSS in order to develop reporting and aggregation standards consistent with this recommendation.

The Final Report

The Final Report specifies minimum requirements and acceptable formats for the reporting of OTC derivatives transaction data by market participants to TRs and by TRs to regulators. The report also discusses issues relating to the ability of authorities, TRs, market participants, and the public to access transaction data in light of confidentiality restrictions and privacy laws. In addition, the report addresses the mechanisms and methods that will be needed for regulators to be able to aggregate the data in a way that fulfils their regulatory mandates, including the use of tools such as LEIs and the development of a standard product classification system for OTC derivative products.

Minimum Data Reporting Requirements

The Final Report recommends that, at a minimum, transaction-level data should be reported to TRs and should include the primary economic terms, counterparty and underlier information, operational data, and event data. In order to facilitate aggregation, the Task Force suggests that data be reported using these broad functional categories, but with minimum, standardised data fields specified within each such category. Additional information, such as information contained in master agreements and credit support annexes, would also be useful but is not currently collected by TRs. As a result, important details such as valuation data, bilateral portfolio-level data, and collateral information may not be captured. The report contains a number of recommendations on how to bridge these data gaps, including expanding the coverage of data by TRs, creating complementary databases, adding new disclosure requirements, and sourcing information through other infrastructures such as central counterparties.4

Access to Data

According to the Final Report, the formulation of general principles or guidance facilitating access to the range of data that may be relevant for different types of authorities would be beneficial but is beyond the mandate of the Task Force. The Task Force recommended in the Consultative Report that the FSB assign this responsibility to an appropriate body or group for timely resolution. The Final Report recommends that TRs implement procedures to enable authorities to access data on a routine basis and also to accommodate ad hoc requests so that regulators can address specific issues as they arise. The report suggests a number of different methods for providing access, such as posting data to a web portal or distributing data by e-mail or other means. Predefined templates should be used for routine reports to help promote standardisation, though regulators should also have access to raw data, particularly in the case of non-routine requests. The Final Report also recommends that reporting entities and counterparties have access to their own data, in raw format, to check its accuracy. Reporting entities should also have transaction-level access to deals reported by counterparties on transactions to which both sides are a party. In order to increase transparency, TRs should also publicly disclose market activity based on the range of data they maintain. This will enable stakeholders to understand the functioning of the OTC derivatives market and facilitate the exercise of market discipline and investor protection. The Task Force recommends that information be disclosed in an aggregated form, covering two principal areas:
  • Information on market activity showing the geographical and currency distribution of activities, including by counterparty type; and
  • Information by state that provides a snapshot view of market concentration.
The Task Force acknowledges that national regulators may require data regarding OTC derivatives trades to be disseminated in a more granular form instead, in which case the data should be released in a format that enables easy aggregation by users. In each case, the level of access and/or disclosure provided will be subject to confidentiality and other legal requirements, and data regarding contracts should not be publicly disclosed in a way that allows counterparties to be identified.

Data Aggregation

The Final Report identifies two general methods of data aggregation that would enable authorities to fulfil their regulatory objectives: legal entity and product aggregation. The report acknowledges ongoing efforts to develop a consistent international framework for the regulation of OTC derivatives transactions and a general recognition by regulators that international co-operation is necessary to effectively aggregate data. However, achieving a global consensus on the methods and tools that are most appropriate for data aggregation across different countries, TRs, and asset classes is a major challenge, as is the fact that legislative proposals in different jurisdictions are proceeding along different timelines. — Legal Entity Identifiers Legal entity identifiers are standard reference codes that would provide a universal method of identifying both financial and non-financial firms that are counterparties to financial transactions, including OTC derivative transactions, or that issue securities or other assets that are the subject of such transactions. Currently, there is no global system of legal entity identification; instead, market participants use various proprietary identifiers, which impedes data aggregation. Implementation of global LEIs presents technical and operational challenges. However, the Task Force sees the establishment of a global LEI as an essential tool for the aggregation of OTC derivatives data. Global LEIs would also make it easier for firms to track counterparties, calculate exposures, and achieve other efficiencies. At their meeting in Cannes in November, the G-20 leaders called on the FSB to co-ordinate an international regulatory effort to establish an appropriate governance framework for a global LEI.5 In response, the FSB formed an ad hoc expert group of authorities in December to work through the key outstanding issues. It is expected that recommendations will be delivered for endorsement by April 2012. The Task Force suggests that an organisation with cross-border membership and suitable governance takes responsibility for overseeing the development of standards and issuance of LEIs as quickly as possible. In order to achieve the objectives set out in the report, the LEIs must be suitable for aggregating OTC derivatives data in and across TRs internationally, with the capability of extension to other aspects of the financial system. The Task Force further recommends that LEIs follow a set of basic data management principles that address the key functions or features of an LEI system needed to enable data aggregation, namely:
  • Uniqueness. Only one LEI should be assigned to any legal entity, and no LEI should be reused.
  • Neutrality. The format should consist of a single data field, with little or no embedded intelligence.
  • Reliability. The LEI should be supported by a trusted and auditable method of verifying the identity of the legal entity to which it is assigned at the outset and on an ongoing basis.
  • Open source. The schema for the LEI should have an open standard in order to ensure maximum compatibility.
  • Extensibility. The LEI should be capable of becoming the single international standard for the identification of legal entities globally across the financial sector.
Furthermore, LEIs should be available on a non-discriminatory, cost-free or low-cost basis, without restriction, and availability should not be tied to other services. In order to promote harmonisation, the report calls on national authorities to take these principles into account when drafting legislation or regulations concerning LEIs. While there have been some calls for market participants to be legally compelled to use global LEIs, the report acknowledges that some jurisdictions may prefer adoption to be achieved through private sector initiatives. — Standard International Product Classification System The Final Report also recommends that the FSB co-ordinate a joint effort by regulators and OTC derivatives industry experts to develop, on a timely basis, a standard product classification system that can be used as a common basis for classifying and describing OTC derivative products. A product classification system would enable regulators to perform data aggregation to monitor exposures to, and positions in, various categories of products. Currently, there are no universally accepted industry standards for describing OTC derivatives contracts and other financial instruments.

Implications

Legislators and securities regulators around the world have been hard at work developing new rules in response to the G-20 leaders' call for greater transparency in the OTC derivatives market. In the U.S., Section 727 of the Dodd Frank Wall Street Reform and Consumer Protection Act requires all swaps, whether cleared or uncleared, to be reported to swap data repositories (SDRs). The Commodity Futures Trading Commission finalized a rule for the registration of SDRs on 1 September 20116 and recently adopted rules to implement a framework for real-time public reporting of swap transaction and pricing data.7 In Europe, meanwhile, the European Market Infrastructure Regulation,8 which would require reporting of OTC derivatives transactions to a legislatively defined TR, is still being negotiated, with adoption expected in 2012. As the Task Force notes, however, if these and other regulations are to work on a global basis, their approaches and timing must be harmonised as much as possible. In December, representatives of the U.S., European, and other authorities responsible for regulating the OTC derivatives markets met in Paris to co-ordinate their efforts. Another meeting is planned for early 2012.9DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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