ISDA rallies support for derivatives data reporting rethink
Eleven financial associations have published their support for a new set of derivatives reporting standards developed by ISDA, which is calling for greater cross-border harmonisation of data standards – even if that means some national laws will have to be amended.
ISDA – essentially the representative body for participants in the derivatives markets with 800 members including banks, exchanges, clearing houses, investment managers, commodities and energy companies, insurers and government entities – has published a set of data reporting principles, which it says will improve the consistency of the data being reported and thus help regulatory transparency.
Part of the drive behind the ISDA principles is the widespread view that although rules such as Dodd-Frank and EMIR have increased the amount of data being reported on OTC derivatives transactions, there are serious limitations in the current system which may make it difficult to make sense of the data collected or even benefit from it at all.
“The problem also lies with internal data quality,” said Bill Blythe, global business development director, Gresham Computing. “As we all know, data within most firms is unstructured and badly managed – to put it mildly. Instructions (a problem from decades ago) are often difficult to manage. Trades with counterparties in different jurisdictions often involve two or more incompatible data stores and trade processing systems. Throw the newer fields into the mix, such as the UTI, USI and LEI – which the front office must be able to handle – and trade reporting becomes a nightmare with data quality issues. I’ve had several discussions with senior investment bankers who are seriously considering the cost of doing business, and whether their firms can actually continue to be an effective and profitable business.”
In response, ISDA has proposed:
- Regulatory reporting requirements for derivatives transactions should be harmonised within and across borders. Toward this end, regulators around the world should identify and agree on the trade data they need to fulfill their supervisory responsibilities, and then issue consistent reporting requirements across jurisdictions.
- Policy-makers should embrace and adopt the use of open standards – such as legal entity identifiers (LEIs), unique trade identifiers (UTIs), unique product identifiers (UPIs) and existing messaging standards (eg, FpML, ISO, FIX) – to drive improved quality and consistency in meeting reporting requirements. Unique global identifiers for legal entities conducting a trade (LEIs), for product types (UPIs) and for trades (UTIs/unique swap identifiers) have been developed. They should be expanded as necessary and their use should be adopted across reporting regimes. The governance of such standards should be transparent and allow for input and review by market participants, infrastructure providers and regulators. Access to the standards, licensing and cost factors should be carefully considered.
- Where global standards do not yet exist, market participants and regulators can collaborate and secure agreement on common solutions to improve consistency and cross-border harmonization. Market participants can, in an open and transparent process, establish a central source (a data dictionary) that defines and clarifies derivatives trade and reference data and workflow requirements for each reporting field required by regulators globally. Direction and support from regulators is critical. Regulators need to be clear and consistent regarding their priorities and set timetables for reform, and we believe it is critical that regulators work in conjunction with the industry to pursue specific standards in the most effective and efficient manner. They should also regularly review this work and facilitate its adoption on a cross-border basis.
- Laws or regulations that prevent policy-makers from appropriately accessing and sharing data across borders must be amended or repealed. Regulators need to continue to work collaboratively to develop a framework that enables appropriate sharing of derivatives trade data across geographic boundaries. Such a framework should contain robust confidentiality safeguards for the secure transmission and maintenance of trade data that prevent data leakage of sensitive trading information such as counterparty information. Roadblocks to the appropriate sharing of data should be removed either by regulatory or legislative action.
- Reporting progress should be benchmarked. The quality, completeness and consistency of data provided to repositories should be tracked, measured and shared with market participants and regulators in order to benchmark, monitor and incentivise progress in reporting.
“Significant progress has been made in meeting a G-20 requirement for all derivatives to be reported to trade repositories to increase regulatory transparency, an objective the Associations fully support,” said ISDA in an official statement. “However, a lack of standardisation and consistency in reporting requirements within and across jurisdictions has led to concerns about the quality of the data being reported. Poor data quality reduces the value of the data for regulators and limits their ability to fulfill supervisory responsibilities. Differences in reporting requirements also increase the cost and complexity for firms that have reporting obligations in multiple jurisdictions.”
The eleven associations which signed a letter in support of ISDA’s principles are: the Australian Financial Market Association, the Alternative Investment Management Association, the British Bankers’ Association, the German Investment Funds Association, the European Fund and Asset Management Association, the Futures Industry Association, the Global Foreign Exchange Division of the Global Financial Markets Association, the Managed Funds Association, the Securities Industry and Financial Markets Association and its Asset Management Group and the Investment Association.
“ISDA believes it is critical that trade execution regimes work on a cross-border basis to ensure regulatory consistency across jurisdictions, proper oversight, transparency and continued competition,” added Scott O’Malia, chief executive at ISDA.
ISDA has been very active on derivatives reform in recent months. In May, the association launched UTIPrefix.org, a service that enables counterparties to obtain a unique trade identifier prefix for derivatives trade reporting. The previous month, ISDA published a set of derivatives trading principles in its paper A Path Forward for Centralized Execution of Swaps, which included a call for greater flexibility on US swap execution facilities.