The Depository Trust & Clearing Corporation (DTCC) today urged Congress to pass new bipartisan legislation to prevent fragmentation of global swaps data and ensure the highest degree of transparency into over-the-counter (OTC) derivatives markets.
In testimony before the House Capital Markets and Government Sponsored Enterprises Subcommittee, Donald F. Donahue, DTCC's President and Chief Executive Officer, strongly endorsed the The Swap Data Information Sharing Act. The legislation would remove the indemnification provisions from the Dodd-Frank Act, which require U.S.-based swap data repositories (SDR) to receive a written indemnification agreement from non-U.S. regulators before sharing critical market data with them.
Donahue also told the Committee that indemnification and a second issue, known as "plenary access," need to be addressed concurrently otherwise data fragmentation is likely to occur.
"Indemnification and plenary access must be dealt with together," Donahue said. "Fragmentation would undermine the ability of regulators to obtain a comprehensive view of the global marketplace, which would impact their ability to see risk building up in the system and provide adequate market surveillance and oversight. While this legislation is a strong step in the right direction, it is one of two key technical corrections that is required to ensure regulators continue to have the highest degree of transparency into OTC derivatives markets."
Indemnification: Fragmenting the Global Data Set and Impeding Regulatory Oversight
The indemnification provision is a source of concern among many regulators worldwide, who have indicated that they would be unable or unwilling to provide such an agreement because the concept is inconsistent with traditions and legal structures outside the U.S. By removing the provision from Dodd-Frank, The Swap Data Information Sharing Act would bring U.S. law into closer alignment with international data sharing protocols developed through the cooperative efforts of more than 50 regulators worldwide, including the CFTC, SEC and Federal Reserve, under the auspices of the OTC Derivatives Regulators Forum (ODRF).
"Dodd-Frank may legally preclude U.S.-based repositories from p providing regulators outside the U.S. with market data on transactions that are under their jurisdiction without an indemnity agreement," Donahue said. "The clear risk is that global supervisors will have no viable option other than to create local repositories to avoid indemnification, which will fragment data globally. While each jurisdiction would have an SDR for its local information, it would be extremely difficult and time consuming to effectively share information between regulators."
Plenary Access: Congress Needs to Clarify Intent of Statute and Rules
"Plenary access" requires U.S.-registered repositories to provide regulators in the U.S. with "direct electronic access" to their data, including data on transactions outside their jurisdiction. While this provision was intended to ensure thorough examination of the SDR's operations, non-U.S. regulators are concerned that the U.S. agencies may interpret it more broadly to mean they have access to all swap data retained by the repository - even when the data has no identifiable nexus to U.S. regulation.
Donahue illustrated the combined impact of indemnification and plenary access using the example of two British banks executing a credit default swap in the U.K. involving a British underlying entity. Under the plenary access provision, if the trade was reported to a U.K.-based but U.S.-registered repository, U.S. regulators could claim a legal right to view data on this transaction - even though the U.S. regulator has no material interest in it. To compound the situation, the indemnification provision would require the British regulator to indemnify the U.S.-registered repository in order to access this same data - despite the fact that the entirety of the trade falls within the British regulator's jurisdiction.
Donahue urged the Committee to amend the legislation to include clarifying language stating that regulators have access to data in which the regulator has a material interest.
"By amending and passing this legislation to address both indemnification and plenary access, Congress will help create the proper environment for the development of a global trade repository system to support systemic risk management and oversight," Donahue said.