The Depository Trust & Clearing Corporation (DTCC) today called for maintaining a single trade repository for over-the-counter (OTC) derivatives contracts during testimony before a subcommittee of the House Financial Services Committee.
Larry E. Thompson, DTCC General Counsel, said, "We are concerned that some in the OTC derivatives market may assume once a trade guarantee is provided through a central counterparty (CCP), there may 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. 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."
DTCC operates the Trade Information Warehouse - the only comprehensive repository and post-trade processing infrastructure for OTC credit derivatives in the world. The Warehouse handles the calculation, netting, and central settlement of payment obligations between counterparties, and automates the processing of "credit events" - situations where the protection against default provided by a credit default swap is activated.
In addition, DTCC's Deriv/SERV matching engine, which electronically captures, confirms and matches over 95% of all credit derivatives traded globally, supplies the Warehouse with more than 41,000 transaction sides daily. The Warehouse connects and services over 1,400 global dealers, asset managers, and other market participants. Thompson noted that trade repository was designed to be extended to other OTC derivative asset classes.
"We believe maintaining a single trade repository for OTC derivatives contracts is an essential element of safety and soundness for two primary reasons," said Thompson, "First, it helps assist regulators in assessing systemic risks, thereby protecting investors and financial markets. Second, as a practical matter, it provides the ability from a central vantage point to identify the obligations of trading parties, which can speed the resolution of these positions in the event of a firm failure, as we found last year in the case of Lehman Brothers."
DTCC has publicly stated that it will support all efforts to create CCP services planned in the U.S. and overseas, on a non-discriminatory basis.
"DTCC supports the role of central counterparties (CCPs) in OTC derivative trading to provide trade guarantees, but the CCPs do not preclude the need to retain the full details of the underlying trading positions in a central trade repository to support regulatory oversight and transparency in this market," Thompson said.
Since last year, DTCC has now seamlessly processed or is processing, through the Warehouse, more than 40 credit events, including the Lehman Brothers and Washington Mutual bankruptcies as well as the conservatorships for Freddie Mac and Fannie Mae. Because the industry had in place a robust, centralized infrastructure for the CDS market in the wake of last year's financial turmoil, market participants were able to manage the multiple processing and operational challenges they faced with a greater degree of certainty and efficiency.
Following the Lehman bankruptcy last year, DTCC played a significant role in unwinding over $500 billion in open trading positions from trades in equities, mortgage-backed and U.S. government securities, without any loss to the industry-and avoiding additional burden on taxpayers.
DTCC recognizes and supports the public policy goals articulated in U.S. Treasury Secretary Geithner's May 13 Letter to the House and Senate Leadership on the need to promote transparency in the OTC markets. DTCC has been working closely with market participants and regulators to achieve that vision. Since November 2008, DTCC has been publishing weekly on its website, key statistics and data from the Warehouse on the size and turnover its the CDS market.
DTCC is a market-neutral, member-owned and governed organization. It is regulated by the Securities and Exchange Commission (SEC), the Federal Reserve Board of Governors and the New York State Banking Department for many of our activities.