Industry lobbies for consistency in regulatory reporting for derivatives

The International Swaps and Derivatives Association (ISDA) has developed a set of principles aimed at improving consistency in regulatory reporting standards for derivatives, with endorsement from 11 industry associations. 

Market participants have faced challenges in reporting OTC derivatives trades because of the varying reporting rules in jurisdictions with different scope and coverage of transactions implemented on different timelines.

Tom Jenkins, partner at KPMG China, said this has made complying with reporting rules difficult because market participants need to tailor their OTC derivatives reporting processes to reflect the specific regulations in force in each jurisdiction. This has been a particular concern for international banks which operate across the region, he said.

"Market participants need to carefully analyse which transactions need to be reported because there are bespoke reporting requirements for each jurisdiction," he said. 


Banks have disparate and complex systems


Anna Gates, regional regulatory and risk leader at Capco in Hong Kong, said financial institutions and service providers have varying supervisory policies, frameworks, controls and infrastructure, and regulators are beginning to take those factors into consideration. She said while the proposition for a consistent way to report derivatives trades is a positive step, considerations have to be given to the fact that a number of banks have disparate and complex systems. This could create a challenge for financial institutions for consistent reporting.

"Having implemented the supervisory framework for a number of large investment, retail, commercial banks, asset managers and private banks, I have seen that no financial institution manages supervision in the same way, so managing derivatives trade reporting will also be challenging for financial institutions," she said. 


Improve transparency and reduce systemic risk


Gates said financial institutions need to work together with regulators to ensure that the cross- border derivatives market is safe and efficient. ISDA's key principles on derivatives trade reporting that seek to improve regulatory transparency are positive steps, she said.

"Such collaborations between regulators and financial institutions are increasingly important to ensure the safety of our global financial system. Harmonising the reporting requirements for derivatives trades would improve regulatory transparency and help to reduce systemic risk," she said.


Harmonising regulatory reporting requirements


ISDA said the principles it had developed call for derivatives reporting requirements to be harmonised across borders; they also sought to encourage the adoption of global data standards, among other things.

Jenkins said harmonising regulatory reporting requirements will take away some of the complexity on trade reporting. He said specific identifiers may be adopted when national regulators respond to the implementation of global standards. These include legal entity identifier, trade identifier and product identifier.

Gates said more roundtable discussions involving ISDA, the front office and support functions at financial institutions as well as regulators would be helpful in developing industry-wide derivatives data that needs to be monitored. She said such initiatives, if they continued to be developed globally and across Asia, will allow regulatory reporting requirements of derivatives transactions to be harmonised within and across borders.

"Most of all, consistent regulatory reporting requirements can be achieved while taking into account local laws, where possible," she said.


Call for laws and regulations to be amended or repealed


ISDA and the 11 industry associations have also called for laws and regulations that prevent policymakers from appropriately accessing and sharing data across borders to be amended or repealed.

Jenkins said certain laws and regulations such as data privacy law and banking secrecy provisions have caused market participants to be unable to report certain trade data. He said this creates added complexity, requiring them to monitor local regulations in other jurisdictions to determine whether or not they can report what they are required to report in the jurisdictions in which they operate. The Hong Kong Monetary Authority, for instance, has asked market participants in Hong Kong to monitor laws and regulations in other jurisdictions that prevent them from reporting counterparty information.

"The Hong Kong regulators are asking market participants to monitor local laws and regulations because they expect them to start reporting trade information which is currently masked as soon as the regulations in the other jurisdictions permit it. This adds to the workload of market participants because they have to monitor the status of confidentiality and secrecy regulations in other jurisdictions. That's why market participants are asking regulators to address this," he said.

Another principle that ISDA has developed concerns benchmarking of reporting progress. It said the quality, completeness and consistency of data provided to repositories should be tracked, measured and shared with market participants and regulators. This was to enable benchmarking, monitoring and providing an incentive to reporting, ISDA said.


Concerns about data sharing


Gates however questioned the need for data to be shared, especially if raw trading data is proposed to be shared among market participants.

"Market misconduct and conflicts could potentially arise and market participants could be in breach of data privacy if various factors are not appropriately considered," she said.

Gates pointed to the Libor and foreign exchange rigging, which demonstrated how market misconduct and conflicts could arise from data sharing, and when there was too much transparency among market participants.

"Could there be a potential for market manipulation or a conflict there [if raw trading data is shared among market participants]? I need to understand more the types of raw data and volumes of data that will be shared. I am not sure what the point is for raw trading data to be shared among market participants. Why are they looking to do it? Are they looking to understand thematic issues they face in more detail?" she said.


Risk of data sharing


Depending on the raw data that might be shared, Gates said data sharing risk providing too much insight into another organisation's trading activity. Instead of sharing raw data, she suggested sharing key themes, data fields and architecture, among others, to allow market participants to resolve the issues they faced.

"It's positive to see globally financial institutions, associations, ISDA and regulators coming together to solve complex issues. The more they can do that by engaging regulators and involving both the front office and control functions such as finance, compliance and IT, the better it is," she said.

The 11 industry associations which have endorsed 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.


 Patricia Lee is South-East Asia editor at Thomson Reuters Regulatory Intelligence in Singapore. She also has responsibility for covering wider G20 regulatory policy initiatives as they affect Asia.

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