The Depository Trust & Clearing Corporation (DTCC) today cautioned in testimony before a House Agriculture subcommittee that the indemnification provision of Dodd-Frank could create unintended negative consequences, including undermining efforts to enhance transparency and mitigate systemic risk in the over-the-counter (OTC) derivatives market.
The hearing was called to discuss global harmonization, extra-territoriality issues and technical concerns with the implementation of the Dodd-Frank Act.
"The underlying legislative intent of the Dodd-Frank Act could be subverted by the legislative language, preventing the exchange of information between regulators and frustrating efforts to identify and mitigate international financial risk and fragment regulatory oversight on a jurisdiction-by-jurisdiction basis," said Larry Thompson, DTCC managing director and general counsel, in testimony before the Subcommittee on General Farm Commodities and Risk Management.
Thompson said that foreign regulators are unlikely to grant US-based swap data repositories (SDRs) indemnification in exchange for access to data as required by the Dodd-Frank Act. Without an indemnity agreement, SDRs may be legally precluded from providing critical market data to regulators overseas. As a result, foreign jurisdictions could be incentivized to create their own local repositories to avoid indemnification—a move that would lead to data fragmentation.
"A proliferation of local repositories around the world would make it very difficult to obtain aggregated data for any particular asset class, impair market and regulatory oversight, create inconsistencies in data, frustrate data analysis and increase systemic risk," Thompson said. "There was no legislative history behind this provision, which was incorporated very late in the legislative process, nor was the indemnification requirement considered in the hearing process. DTCC believes the indemnification provision will significantly impede global regulatory cooperation."
Thompson noted that while "technical correction" legislation would address the issue, he urged the Subcommittee to consider interim measures as well, including recognizing regulators who
operate in a manner consistent with international agreements or regulatory forums, such as the OTC Derivatives Regulaators Forum (ODRF), which includes maintaining the confidentiality of data. In addition, Thompson said modifications to the Dodd-Frank Act could also include provisions that deem compliance with those international agreements or regulatory forums as consistent with the indemnification requirement.
The ODRF is comprised of nearly 50 regulators and other authorities worldwide, including all of the major regulators and central banks in the U.S. and Europe.
DTCC currently operates a global Trade Information Warehouse, a centralized, comprehensive global electronic data repository containing detailed trade information for the global CDS markets. The TIW database currently represents about 98% of all credit derivative transactions in the global marketplace. It holds approximately 2.3 million separate contracts with a gross total notional value of $29 trillion and has operations in both the U.S. and the European Union.
DTCC recently launched an automated portal to provide regulators worldwide with direct, on-line access to global CDS data registered in the TIW -- the first such global regulatory service of its kind in the financial market place. Over 25 regulators around the world have registered and are active on the portal. The portal allows for each registered regulator to access reports tailored to their specific entitlements as a market regulator, prudential or primary supervisor, or central bank. These detailed reports are created for each regulator to show only the CDS data relevant to the individual regulator's jurisdiction, regulated entities or currency.