A string of recent announcements indicate that global regulatory bodies as well as industry players are increasingly working together to clean up the Over-The-Counter (OTC) derivatives markets.
A string of recent announcements indicate that global regulatory bodies as well as industry players are increasingly working together to clean up the OTC derivatives markets.
New Rules, New Challenges
Until recently, derivatives markets have enjoyed rather lax reporting requirements. Comprised predominantly of large intuitional investors, the general sentiment was that they can look after themselves. However, after a number of high-profile market manipulation scandals, such as the LIBOR and FX fixing sagas, the need for stricter oversight and reporting requirements was highlighted.
As such, a number of jurisdictions have introduced new rules. Notably, ESMA, the EU’s financial watchdog, has passed legislation that will raise reporting requirements and compel firms to monitor orders, trades and communications in an effort to snuff out further market abuse.
However, regulators and financial service providers alike have run into difficulties as they prepare for full implementation of the new derivatives reporting rules. Specifically, they face a lack of standardisation and consistency across jurisdictions and concerns about the quality of the data being reported. This, in turn, leads to issues of effectiveness, complexity and cost.
In response to new derivatives reporting rules, several actions seek to improve data quality and standardisation of reporting requirements accross jurisdictions.
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In response to these issues, the International Swaps and Derivatives Association (ISDA) on June 15 announced that a group of eleven industry associations have endorsed a set of principles which seek to improve consistency in regulatory reporting standards for derivatives.
The principles recommend that:
- Regulatory reporting requirements for derivatives transactions should be harmonised within and across borders;
- Policy-makers should embrace and adopt the use of open standards;
- Where global standards do not yet exist, market participants and regulators can collaborate and secure agreement on common solutions to improve consistency and cross-border harmonisation;
- Laws or regulations that prevent policy-makers from appropriately accessing and sharing data across borders must be amended or repealed; and
- Reporting progress should be benchmarked
Such calls for cooperation are echoed in the recent release of the Fair and Effective Markets Review, which was jointly produced by the Bank of England, the UK Treasury and the Financial Conduct Authority (FCA). The review emphasises the need for coordinated international action, including “agreeing a single global FX code providing a comprehensive set of principles to govern trading practices around market integrity, information handling, treatment of counterparties and standards for venue – as well as stronger mechanisms to ensure market participants adhere to that code”.
Reflecting such calls for greater collective responsibility around data and information harmonisation, the Depository Trust & Clearing Corporation (DTCC) yesterday announced their recommendations for global data harmonisation.
In order to be able to fully capitalize on all of the benefits of this data, greater data standardization across repositories is required.
In a report to a joint CPMI-IOSCO harmonisation working group, the post-trade market infrastructure firm recommended harmonising approximately 30 data fields across global trade repository providers, creating what has been described as a global data dictionary. The recommendations were seen as essential to ensure financial stability and sound systemic risk analysis.
Larry Thompson, Vice Chairman and General Counsel of DTCC, which operates the world’s largest global trade repository, stated: “In order to be able to fully capitalize on all of the benefits of this data, greater data standardization across repositories is required.”