The fragmentation of trade reporting rules and the lack of a common data set across jurisdictions hinders transparency and global risk monitoring, writes DTCC’s Priya Kundamal.
Market disruptions often spur change. In response to the 2008 Global Financial Crisis, one of the G20 reforms was to mandate the reporting of over-the-counter (OTC) derivatives transactions to trade repositories, with the goal of improving transparency and lowering systemic risk. More than a decade later, there is now more transparency in the OTC derivatives markets, and important insights on reportable data have become available across jurisdictions.
But this leads to another question: Has the work that has been done so far truly fulfilled the transparency and risk reduction goals originally set forth by the G20? While great progress has been made at the local level, more needs to be done to reach the level of transparency and global risk monitoring identified as critical by the G20 over a decade ago. To get there, there must be greater regulatory harmonisation of trade reporting rules – specifically to enhance consistency among jurisdictions and facilitate far greater transparency in global markets.
Enabling a Consistent Format to Capture Data
Because of domestic compliance requirements, different data fields and formats have been implemented for trade reporting across G20 jurisdictions, resulting in variations in the amount and type of data captured. Under the current fragmented framework, the ability to aggregate and analyse data to monitor mounting risk across markets is challenging.
A consistent approach to capturing data based on agreed global standards and data fields would help to enable a truly global reporting framework – leading to the collection of common data sets that can be converted into globally valuable insights. Meaningful data could then be shared between and across markets via regulator-approved cross-border data channels.
Working Towards Data Harmonisation
Regulators started on their paths to implement common data standards around trade reporting well over a year ago. The Commodity Futures Trading Commission (CFTC) on 20 February 2020 announced its proposed amendments to reporting rules that incorporated critical data elements (CDE) in swap reporting submissions, leading the way toward achieving a higher degree of homogeneity and data harmonisation. Developed by the CPMI-IOSCO working group for the harmonisation of key OTC derivatives data elements, the CDE is aimed at enabling data aggregation and transparency across jurisdictions.
The technical guidance on the CDE does not mandate which CDE regulators should require to be reported in their jurisdictions. It instead details a set of common data elements necessary to understanding derivatives transactions that form the basis of the CDE each jurisdiction could decide to adopt. The important point of the guidance was that when a jurisdiction determines which CDE it requires to be reported, that CDE would be reported using the same definitions, format and allowable values.
The adoption of the CDE has been included in the final CFTC revision of rules for swaps reporting, commonly known as the CFTC Rewrite, with an effective date in 2022. Canadian financial regulators are also expected to follow suit in adopting the CDE. Across the pond, the European Securities and Markets Authority (ESMA) has also included the CDE in its technical standards published under the European Market Infrastructure Regulation (EMIR) Refit, now in the process of being approved by lawmakers.
Unfortunately, differences in CDE adoption mean for now firms are still caught in a cycle of updating their reporting systems to meet new rules that do not lead to a common data set across jurisdictions. This environment is operationally inefficient and fails to achieve the goal of transparency.
Increasing Regional Cooperation
In Asia, the ability to share data across jurisdictions is still relatively untapped. The data that is reported across Asia is different from the data that is reported in other regions. With that said, there is a steady and gradual shift to decrease the variance in OTC reporting between jurisdictions in Asia. In fact, regulators in Singapore and Hong Kong are currently reviewing proposals from their counterparts in the US and Europe and we expect to see the CDE proposal become part of the OTC reporting evolution across Asia as well.
The Australian Securities and Investments Commission (ASIC) has emerged as the first regulator in the region to move on OTC reporting evolution, having released a consultation paper proposing changes to simplify the ASIC Derivative Transaction Rule. Because the CFTC and ESMA did not entirely agree on a common approach to the CDE, ASIC’s proposal unfortunately is a mix of the ESMA and CFTC approaches – pointing again to the lack of a common data set across jurisdictions.
That said, in Australia, Singapore and Hong Kong, there is an increased level of regional discussions and collaboration on moving towards harmonisation of trade reporting requirements. This is evidenced in the focus on driving the adoption of a standardised Unique Transaction Identifier (UTI) – aimed at segueing into greater regulatory harmonisation. While the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) have mandated partial adoption of UTI for OTC derivatives reporting, ASIC and the Monetary Authority of Singapore (MAS) have been actively working towards ensuring that the UTI rollout is harmonised across the region.
Adhering to global standards will allow for clean implementation of the UTI. This is particularly important for firms with global footprints. Following guidance issued by the CPMI-IOSCO on harmonising the UTI, the adoption of global standards for eventual implementation is likely to happen in Australia, Singapore and Hong Kong.
Looking Beyond the Next 12 to 18 Months
While there has been some progress in discussions around regulatory harmonisation in the area of trade reporting data, more work is needed. Admittedly, there may be complications that come with reporting across multiple jurisdictions due to local nuances and data sharing policies. Nevertheless, the march towards global harmonisation is moving steadily ahead. Market uncertainty caused by COVID-19 and recent market volatility have highlighted again the need for wider acceptance of data sharing across national boundaries to identify emerging risks and the impact of market activity within and outside of national borders.
Given the interconnectedness of markets and the global nature of derivatives trading, harmonizing trade reporting mandates across jurisdictions will provide regulators around the world with a more complete and holistic view of the OTC derivatives market. This is the biggest opportunity moving forward.
Priya Kundamal is General Manager and Head of DTCC Data Repository (Singapore).