Regulators will have difficulty obtaining a “single snapshot of risk” in the vast over-the-counter derivatives markets unless such markets are required to use a single database that has recorded all trades done, the head of the largest markets post-trade group warned on Tuesday.
The comments, by Don Donahue, chairman and chief executive of The Depository Trust & Clearing Corporation, are a sign of DTCC’s concern that a proliferation of clearing initiatives in the US and Europe could lead to fragmentation of important data about OTC derivatives.
The DTCC has a dominant position in the US clearing and settlement business but is starting to come under threat from the emergence of other derivatives post-trade initiatives. In US equities, DTCC will soon face competition from Nasdaq OMX, the exchange, which is working on setting up a clearer.
The Obama administration and the European Union have both called for greater use of clearing for the vast, bilaterally negotiated OTC derivatives markets to help safeguard the financial system against the fallout from future catastrophic defaults, such as that of Lehman Brothers last year.
Both sides have also demanded greater use of databases – such as the DTCC’s “trade information warehouse” – to record and store records of trades electronically. Such information would be available to regulators to help them monitor market risks.
However, the issue of whether there should be more than a single “repository” has yet to be resolved. In addition, some European regulators favour establishing a European warehouse in addition to the DTCC’s own repository.
Mr Donahue said the DTCC agreed with demands of regulators that the terms of all OTC derivatives should be recorded in a registry of trades.
But he said the proliferation of OTC derivatives clearing initiatives – six so far in the US and Europe – meant there was potential for “fragmentation of data about the market, if there’s no central repository storing all the data in one place”.
The DTCC had been lobbying Congress to “codify into law” the continued operation of a single, global repository “to ensure the underlying position data for both standardised and non-standardised OTC derivative contracts are accessible to regulators”, Mr Donahue said.
On Tuesday, the DTCC also confirmed that the US Department of Justice had approved its proposed derivatives processing company with Markit Group.
Separately, the DTCC said it had received an information request from the DoJ last week as it investigated the possibility of anti-competitive practices in the credit derivatives clearing, trading and information services industries.
Additional reporting by Michael Mackenzie
