Text: A global trade repository (TR) for each derivative asset class would create significant efficiencies, yet in Asia the industry seems to be moving in the other direction. Competition and not consolidation seems to be the order of the day. Nevertheless, many expect to see US post-trade services giant the Depository Trade and Clearing Corporation (DTCC) emerging as a regional force in the longer term.
“There is a lot of debate in the region but what is obvious is that the DTCC is one step forward,” says Simona Catanescu, director for Post-Trade Markets, Asia-Pacific at Swift. “It has more than just a regional presence, it has a global warehouse which adds more value. The HKMA TR in Hong Kong already links into its global warehouse and I think we will see greater cooperation between DTCC, SWIFT and regional TRs.”
The DTCC global trade information warehouse was first established in 2000 as a ‘golden source’ for credit default swaps. Its role was crucial in unwinding positions during the Lehman collapse, as the vast majority of contracts executed by global derivatives dealers and more than 1100 buy-side firms in 31 countries were registered there. The result was that the DTCC was able to net down the US$72bn of Lehman Brothers credit default swap (CDS) contracts that were outstanding at the time of its failure, and calculate the amount owed by net sellers of protection to net buyers of protection.
Post-Lehman, the creation of one global trade repository (TR) for each derivatives segment – interest rates, credit, equity, foreign exchange and commodities – where transactions can be reported under a common set of data standards became a core plank in the International Swaps and Derivatives Association (ISDA) and the Group of 20 (G-20) plans. The goal was to establish a single reference point for both financial derivatives players and their supervisors while facilitating regulators’ ability to gain timely access.
The hope is that closer co-operation between regulators will harmonise data reporting standards as well as address client data confidentiality issues. Also the opportunity for inappropriate disclosure of information would diminish if different jurisdictions had the same standards of what trade elements are made public in their respective repositories. To date, though there have been no widely accepted agreements and regulators tend to share data with each other on an ad hoc basis relating to specific events.
“The general view is that a common framework for trade reporting is a good thing, mainly because it reduces the workload and creates operational efficiencies,” according to Conor Cunningham, head of futures & OTC clearing Asia Pacific, at broker and custodian BNP Paribas. “If there are multiple trade depositories, then it becomes a huge exercise. I think it will take time but there will be a natural evolution where people recognise each other as equivalent regimes.”
Peter Tierney regional head of Asia for DTCC Deriv/SERV, responsible for its trade repository initiatives in the region, says, “The original intention when we built our trade repository was to create a utility that increased operational efficiencies and mitigated risk for OTC swaps. Today, post crisis, the regulators have placed great importance and focus on the value these services bring for transparency and visibility however, the opportunity for increased operational efficiency and risk mitigation are still as relevant.”
This plan is not shared by regulators in Asia, who have adopted different approaches to the reporting of OTC trade data. A framework to share data from swap dealers and major swap participants has yet to be formulated. Many have opted for a phased approach to reporting with the first stage covering standardised interest rate swaps (IRSs), CDSs and foreign exchange transactions followed by equity and other asset classes.
Japan was first out of the starting gate launching its trade repository in April, while Singapore, Hong Kong and Australia are all looking to launch their own versions by the end of the year, although deadlines may shift. The DTCC has been active in many markets; it made history in Japan as the first trade repository to offer OTC derivatives reporting services in Asia, and it opened a data centre in Singapore at the end of last year. It has also agreed in principle with the Hong Kong Monetary Authority to be an agent to its trade repository when it goes live.
Other local TR contenders are expected to muscle in but few are likely to match the DTCC in terms of its global reach and cross border reporting experience. “DTCC has the tools and infrastructure plus they have significant linkages with the sell side which will give them a head start,” says Philip Popple, derivatives product specialist at custodian BNY Mellon. “I also do not see any other repositories with the same global prominence.”
Matching the cost efficiencies of a firm like DTCC would be difficult given the scale of its existing investment. Tierney notes that it is an expensive proposition to build an infrastructure as well as to have the legal and compliance systems to meet the new regulatory requirements.
“This is a scale initiative and it is not easy for a local or regional player to realise the economies or transparencies that a global initiative can offer” he said. “Moreover, the region is not without its challenges particularly in terms of sharing data and confidentiality. Every regulator will bring its own set of rules and there may be an issue with fragmentation in terms of their immediate ability to assess systemic risk. We hope we can be part of the solution by offering a common, multi-jurisdictional response.”
In the short term, conflicts of interest are likely to widen rather than diminish under the burden of the new OTC rules. For example, the Hong Kong Monetary Authority in its preliminary assessment stated that there is no barrier for local entities to fulfil their reporting obligation in Hong Kong, but for cross-border transactions it is a different story. Client confidentiality and bank secrecy obligations under certain overseas laws may prevent reporting entities from providing their overseas counterparties’ information.
As Michael Steinbeck-Reeves, Japan-based managing consultant at post-trade consultancy Catalyst puts it, “I am not sure a one size fits all model in the region can work. In Europe, there is a precedent for cross-border reporting but that doesn’t exist in the Asia Pacific region. One answer is because people are protective of their data and there are concerns if there is too much transparency, it may cause leaks and people will be able to trade off the data.”
The situation is best summed up by a recent report commissioned by the International Swaps and Derivatives Association (ISDA). It noted that while the US and European regulation will affect the region, especially on clearing, these disparate markets are “united in their diversity”. It added, “Local factors are overwhelmingly important, with local regulations, local market drivers, and local customs having a strong impact on each country and thus on market participation.”
This could change though as the market develops and matures. For now, the region represents around 8% of the total US$648 trillion OTC derivatives market. However, last year witnessed a healthy 25% hike from 2011 to US$42.6tn in notional outstanding while turnover jumped to a five-year high of US$186tn. Singapore was the dominant player followed by Australia, Hong Kong and Japan although Tierney believes that there are significant opportunities in the so-called tier two countries such as Malaysia, Indonesia and Thailand.
“We are targeting those smaller countries and conducting an open dialogue,” says Tierney. “They want trade reporting but it is at the very early stages and at the moment our main focus is on sharing experiences and education around data standards, privacy and confidentiality.”