DERIVATIVES: Repositories may need collateral data – report

4 min read
Christopher Whittall

Trade repositories for over-the-counter derivatives may need to collect information on netting and collateral agreements between counterparties if they are to be effective tools for assessing systemic risk and financial stability, according to a new report.

Such information is currently “far beyond the scope” of trade repositories, according to the Report on OTC derivatives data reporting and aggregation requirements published today by CCPS-IOSCO – a task force composed of two international regulatory authorities – which puts forward various recommendations as to how to bridge these potential data gaps.

While trade warehouses are currently envisioned as “transaction repositories”, the task force notes their scope excludes information contained in derivatives master agreements and credit support annexes, as well as data relating to collateral or payment transfers, or valuation data coming from external sources. Such data could help assess systemic risk and financial stability, according to the report.

“Since OTC derivatives portfolios are often collateralised, information about the application of collateral to OTC derivatives portfolios is essential for measuring bilateral counterparty exposures,” the report stated.

“Authorities responsible for systemic risk monitoring and oversight have an interest in centralised data sources for both collateralisation and collateral information. Collateralisation and collateral-related information would thus be helpful in assessing actual counterparty exposure.”

As well as detailing how exposures are collateralised, the type of collateral posted should also be reported. Regulators might also be interested in information about uncollateralised net exposures between counterparties, the custody and legal framework for the collateral, valuation of collateral, and events that may lead to increases in one party’s collateral obligations.

The paper notes it is difficult “to reconcile the primary function of a [trade repository] with the mandatory collection of collaterasation data”, but suggests there may be alternative ways to achieve this aim, such as clearing houses or dealers directly reporting collateral information to supervisors.

The report highlights bilateral portfolio level data is another potential blind spot for trade repositories. The task force notes both gross and net notional amounts are relevant for assessing OTC activity between two counterparties. However, measuring notional amounts could require aggregating figures across all trade repositories, underlining the need for some kind of legal entity identifier system, as well as a standard product classification system.

This is particularly relevant given indications of competition in the trade repository space. The Depository Trust and Clearing Corporation – or subsidiaries owned by the firm – have won official mandates to establish a trade repositories for all derivatives asset classes. However, other notable derivatives infrastructure firms – such as ICE and the CME – have announced they will build their own trade repositories, raising the prospect of data fragmentation between different venues.

“This may reduce the capacity of [trade repositories] to calculate net notional amounts since no single [repository] would have relevant access to all data,” the report states.

Trade groups and regulators already demanded earlier this year that major dealers adopt such a barcoding system, which should facilitate interoperability between different venues. The CCPS-IOSCO report says further international consultation would be beneficial in this regard, while suggesting the Financial Stability Board calls for an industry-led project to establish a product classification system.

Another potential data gap for repositories centres on valuations of individual transactions, which are not currently recorded by repositories beyond initial pricing information. Including more valuation data would be challenging, though, as valuations for some derivatives products may vary across institutions and over the life of the trade.

Elsewhere, the report recommends repositories provide authorities with effective access to market data in order to assess risk in the market, an initiative already undertaken by the some repositories.

With regard to public access to data, the report suggests “it should allow for a broad assessment of financial stability of the overall OTC derivatives market”, while ensuring the data disclosed meet confidentiality requirements and do not reveal “individual firm positions or provid[e] the public with information to indirectly infer these positions”.

The paper is open for comments until September 23, and a final report will be published by the end of 2011.