International regulators and central banks have warned that moves to safeguard against systemic risks posed by the vast $6,000bn over-the-counter derivatives market risks being undermined by potential “data gaps” in the information warehouses that store details on trades.
A report published on Wednesday by the Bank of International Settlements cautioned that further information on off-exchange trades “would be helpful in assessing systemic risk and financial stability” and proposed that a global minimum set of data be reported by banks on their derivatives trades.
The drive by regulators for more transparency is part of a package of financial markets reforms agreed by G20 nations in Pittsburgh in 2009 in the wake of the failure of Lehman Brothers. Global leaders agreed all standardised over-the-counter derivatives should be traded on exchanges or other electronic trading platforms; that they be processed through clearing houses; and that trades be reported to data warehouses known as trade repositories. Such a move would provide regulators with a full electronic audit trail for all trades.
But the BIS has identified “data gaps” in the information on bilateral portfolios of OTC derivatives transactions, which extend to details on exposures, amounts posted as collateral as well as market values of open transactions and reference data on affected parties in the event of a counterparty’s default.
Cracks have also emerged in the global consensus over how to implement the reforms, which are due to be concluded by the end of 2012. The US has backed a single, central repository for each asset class, with information shared with all relevant regulators globally to avoid fragmentation of data. Europeans have called for their own data warehouse.
Regulators are also aware of significant legal and technical issues to overcome. At present there is no global standard way to identify parties in financial contracts, with the standard practice to assign a unique “ID” to each OTC trade that is reported to a repository.
The Financial Stability Board, which works under the Bank for International Settlements to co-ordinate the work of national regulators at a global level, wants to establish a universal Legal Entity Identifier through international consensus.
The report was compiled by BIS’s Committee on Payment and Settlement Systems and the technical committee of International Organisation of Securities Commissions, which includes national regulators such as the UK’s Financial Services Authority and the US Securities and Exchange Commission.
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