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.

More than a decade after the introduction of rules requiring the reporting of all derivatives to trade repositories, some regulators have started to ask questions once again about the level of transparency in the derivatives markets. The trigger has been the sudden emergence of several recent bouts of market turbulence that seemed to have occurred without warning – precisely the type of events the reporting of data was meant to prevent. But, as a recent ISDA paper on transparency points out, a significant amount of information does currently exist that, with sufficient data cleansing and analysis, could help regulators spot warning signals.

The paper looks at trade reporting rules for derivatives in the EU, UK and US, noting that data is available on counterparty identity, notional amounts, valuations and risk metrics, such as delta and DV01. This information reported to trade repositories can allow regulators to identify both counterparties to a trade and all counterparties within a single corporate structure, see and monitor changes in trading activity by those counterparties and track fluctuations in the value of derivatives contracts.

Interestingly, the European Securities and Markets Authority was able to spot the increases in exposure at failed hedge fund Archegos in an ex-post analysis, based on data reported to EU trade repositories by Archegos’s EU derivatives counterparties.

The question is how to get to a point where regulators can spot these exposures in real time, rather than after the fact. While the raw data does exist, there’s no doubt additional time, effort and resources are needed to make it more functional. Ultimately, it requires regulators to invest in systems and data analytics to ensure reported data is cleaned, standardized and mapped so it can be more easily analyzed – for example, by developing management dashboards to signal changes in positions and exposures on a current basis.

Steps should also be taken to enable regulators to access data they are not directly authorized to receive, either because it’s reported outside of their jurisdiction or because another domestic regulator has authority over the reporting entity. One potential solution is for regulators to sign memorandums of understanding (MOUs) with each other that would enable them to share this information. While there may be legal and privacy issues with this approach for some, it will help provide a fuller picture of global exposures for many.

Longer term, improvements to the reporting framework can and should be made. Regulators around the world are changing their derivatives reporting rules to incorporate globally agreed critical data elements intended to improve the consistency and accuracy of reported data. That’s an important step – but differences do still exist, and each firm must interpret and implement each rule set independently, which can lead to discrepancies in reported data. Initiatives like ISDA’s Digital Regulatory Reporting initiative can help by enabling firms to use a single common interpretation of each rule set as open-access, human-readable and machine-executable code, helping to ensure regulators receive data that is more consistent and accurate.

But that doesn’t mean the data reported now is of limited use. The vast trove of information within trade repositories can provide invaluable signals to regulators – but it requires investment in data cleaning and analytics. MOUs could also help regulators get a fuller picture of exposures. Simply asking for more data to be reported is not going to solve that problem.

For more information on ISDA’s Digital Regulatory Reporting initiative, click here.

Digital Regulatory Reporting will also be discussed at ISDA’s Derivatives Trading Forum in London on November 7. Find out more and register here.

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