Iosco warns on data challenge to risk oversight

The top body representing global markets watchdogs has issued a warning over the proliferation of data collection systems in the $700tn derivatives markets, saying regulators will be unable to spot risks building up in the financial system unless data are aggregated properly.

The group of G20 nations in 2009 directed governments to create a composite record of over-the-counter (OTC) derivatives deals to better spot potential systemic risk in banks and clearing houses and help prevent the next big financial meltdown.

But there has been a proliferation of electronic data warehouses that do this job, known as trade repositories, with 25 of them operating in 11 jurisdictions around the world.

Under regulations implemented in the wake of the financial crisis such as the Dodd-Frank act, banks and asset managers are to report derivatives trades to repositories so as to create an audit trail of who traded what, at what price and when.

David Wright, secretary general of the International Organisation of Securities Commissions (Iosco), said there were “too many trade repositories” and that “the plugs don’t fit”.

“Basically you’ve got a fragmented situation and the challenge is to get all of these things connected up so you can get an aggregate picture [of markets],” he said after attending the International Swaps and Derivatives Association’s Asia meeting in Singapore.

His warning underscores how regulators are increasingly worried about how to spot the next crisis given that new regulations designed to clean up after the 2008 crisis, especially that more derivatives are traded elecronically and not by phone, are creating a wave of new data that must be tracked and monitored.

“I do think there is a general data issue,” said Mr Wright, formerly a senior bureaucrat in the European Commission involved in drawing up Europe’s post-crisis regulations. “I think we don’t have a sufficient understanding of market-based financial [data].

“We must have the data we need in order to be able to judge whether risk is building up in different parts of the markets and an understanding of how markets are interconnected, to spot contagion channels.“

He singled out shadow banking as another area of concern.

No framework yet exists that would allow global regulators to track or monitor risk in cross-border markets. Some countries’ data privacy and confidentiality laws are also preventing regulators sharing data across borders.

A month ago the Financial Stability Board recommended creating a single centralised repository, either physical or digital, to draw together fragmented data on trades for the OTC markets.

Australia and Singapore have agreed to allow their regulators mutual access to trading data stored in electronic warehouses in each country, in the first attempt globally to allow sharing of such information.

However, Isda, the main body for derivatives market participants, has cast doubt on the viability of a centralised utility for data sharing. Scott O’Malia, Isda chief executive, last month called the FSB’s recommendation a “dream”.

Regulators needed to focus on harmonising standards and “making sure we are doing an apples-with-apples comparison with the data”, he said.