SDR Indemnification Removal: A Good Step Forward

ISDA Chief Executive Officer Scott O'Malia offers informal comments on important OTC derivatives issues in derivatiViews, reflecting ISDA's long-held commitment to making the market safer and more efficient.

An important yet largely unnoticed step in efforts to improve regulatory transparency came to pass last week. A bill to remove a provision within the Dodd-Frank Act that essentially compelled foreign regulators to indemnify US swap data repositories (SDRs) against litigation related to information provided by those SDRs became law.

The need for a technical fix to Dodd-Frank to remove this provision has long been recognised by US legislators and regulators. With foreign authorities unable or unwilling to provide indemnification, it meant global regulators were unable to get a complete picture of risk exposures, hindering transparency of derivatives markets.

While at the Commodity Futures Trading Commission (CFTC), several of my fellow commissioners and I heard first hand from overseas supervisors how big an issue this was. We called for the problem to be addressed – a position repeated by several of our successors at the CFTC since. That view was also shared by many US legislators, and earlier attempts to remove this provision garnered significant bipartisan support in both the House and Senate.

Five years on from the enactment of Dodd-Frank, the provision has finally been removed. This is extremely welcome, and marks a big step towards the sharing of derivatives transaction data across borders – in turn, enhancing transparency and enabling regulators to better monitor risk exposures and market activity.

More needs to be done, however. As it stands, a variety of data protection, client confidentiality and blocking statutes prevent counterparties from reporting key data, particularly when the repositories are domiciled in foreign jurisdictions. The CFTC has got round some of these legal barriers by temporarily allowing reporting parties to ‘mask’ the identity of their counterparties so as not to breach secrecy and data protection laws in foreign jurisdictions. But this needs to be tackled urgently to encompass all jurisdictions with privacy barriers, and to provide such protections to all parties with reporting obligations in a more permanent way in order for a global, transparent reporting regime to work properly.

The Financial Stability Board (FSB) has recognised this issue, and has set a deadline of June 2018 for FSB member jurisdictions to remove any barriers to reporting complete information, and to stop the masking of counterparty data by the end of 2018. FSB members are required to report the actions they plan to take by June 2016. Concurrent with this, the FSB member jurisdictions should prioritise the signing of memorandums of understanding (MOUs) between regulators to facilitate the sharing of data across borders. A couple of MOUs have already been signed, but use of this important tool is rare.

However, other, non-FSB members also need to tackle this issue – countries like Algeria, Bahrain, the Philippines and Taiwan, to name just a few. The masking of data cannot be eliminated entirely until legal barriers are addressed in those countries as well. Otherwise, firms face the unenviable choice of violating the reporting requirements in Dodd-Frank and similar legislation elsewhere, or breaching domestic secrecy laws.

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