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When U.S. regulators issued their long-anticipated swap definition rules, the clock began ticking for financial institutions to get ready to comply with new regulations designed to increase transparency in the over-the-counter derivatives market.
It is anticipated that by January, the lion's share of the swap dealer community will be either reporting or preparing to enter their swaps transactions to swap data repositories - essentially large databases designed to store comprehensive trade information on OTC derivatives transactions. These SDRs, or trade repositories as they are known outside the United States, are a key tool for boosting market transparency.
The infrastructure is fully in place for the financial industry to meet this deadline. For example, the Depository Trust and Clearing Corp. SDRs are already testing for connectivity, and market participants are quickly learning how to report their trade data under the Dodd-Frank Act. Based on our six years of experience operating the global repository for credit default swaps, we expect compliance with the new trade reporting requirements to look similar to the existing voluntary reporting that has brought an unprecedented level of transparency to this market.
This experience reinforces the notion that the Dodd-Frank provisions related to post-trade swap reporting will yield a wealth of information for regulators and market participants. But while transparency is the first step in giving regulators the information needed to better understand systemic risk and more effectively perform market surveillance and oversight functions, it is not, in and of itself, the endgame.
Regulators must also have the tools to analyze the data to manage systemic risk and identify potential abusive or manipulative market behavior - including red-flagging excessive risk-taking so that timely actions can be taken to prevent or mitigate systemic shocks to the financial system.
Having the raw data is important, but regulators must also be equipped with the necessary resources to understand and analyze that data. Otherwise, the full benefits of reporting swap transactions will not be realized.
As a starting point, regulators should consider requiring the financial services industry to create and populate data collection and reference data systems such as trade repositories and legal entity identifiers. This would free up the public sector to dedicate scarce resources to develop the analytical tools and processes to help regulators interpret data and perform their oversight responsibilities. As has already been demonstrated, existing infrastructures can be leveraged and new infrastructures can be created very quickly through industry collaboration.
It is incumbent upon industry participants to work closely with Congress and regulators to ensure that the new rules are adopted and implemented in a manner consistent with the statute and that allows for the identification and mitigation of risks to the financial system.
Ensuring access to comprehensive, accurate and timely data, along with regulators having the tools to analyze this information, is vital to the success of these efforts and essential to achieving the goals of Congress.
Larry Thompson is managing director and general counsel of the Depository Trust and Clearing Corp., a noncommercial cooperative that provides post-trade infrastructure services for global financial markets.