The Depository Trust and Clearing Corporation has called for legislative changes mandating the use of a trade repository for over-the-counter (OTC) credit derivatives contracts in testimony submitted to the House Financial Services Committee.
In the testimony, DTCC general counsel Larry Thompson warned that current legislative proposals - which require only those trades that are not cleared through a central counterparty (CCP) to be reported to a repository - could undermine the goals of re-regulation and represent a step backward by reducing the level of transparency that now exists in the marketplace.
"We are concerned that the legislative proposals under consideration would have the effect of denying regulators the opportunity to see systemic risk from a central vantage point because it would fragment the existing information on CDS contracts stored in the repository," Thompson said. "We strongly recommend that the draft legislation before the House be revised to ensure that all credit default swap trades, regardless of whether they are cleared or not, be reported to a single swap repository, which exists to provide regulators and the public with the consolidated information they need during normal times, and, especially, at times of crisis."
DTCC's Trade Information Warehouse currently connects and services 1400 global dealers, asset managers, and other market participants.
Thomson believes the proposed rule changes would discourage use of the warehouse as participants assume that once a trade guarantee is provided through a central counterparty, there would be less need for a central registry to track the underlying position data.
"We reject this view, based on our long experience managing the risk flowing from the failure of a single member firm," he says. "At the critical juncture of a firm failure, knowing the underlying position data of multiple transactions in a timely manner will be significant in providing transparency to regulators-and in protecting confidence in the market itself. We believe the role of having a central repository should be reinforced as a matter of public policy."