Dodd-Frank’s unintended consequences

Also, foreign governmental agencies will simply not indemnify private third-party entities, such as trade repositories, nor do they believe indemnification is necessary in light of current international data sharing guidelines developed through the cooperative efforts of more than 40 regulators worldwide, including the CFTC, SEC and Federal Reserve in the U.S. 

{mosads}However, Dodd-Frank may legally preclude U.S.-based repositories from providing regulators outside the U.S. with market data on transactions that are under their jurisdiction without an indemnity agreement. The clear risk is that global supervisors will have no viable option other than to create local repositories to avoid indemnification, which will fragment data globally.

The House Capital Markets Subcommittee is holding a hearing tomorrow at which I will testify on legislation, The Swap Data Information Sharing Act, to remove the indemnification provisions from Dodd-Frank. DTCC strongly supports this bill because the statutory language in the law leaves little room for regulators to act without U.S. Congressional intervention – a point that was reinforced in the recent CFTC/SEC Joint Report on International Swap Regulation.  

However, resolving indemnification without addressing a second issue, known as plenary access, leaves open the likelihood that global swap data will be still be fragmented by jurisdiction. 

“Plenary access” requires U.S.-registered repositories to provide regulators in the U.S. with “direct electronic access” to their data, including data on transactions outside their jurisdiction. While this provision was intended to ensure thorough examination of the SDR’s operations, non-U.S. regulators are concerned that the U.S. agencies may interpret it more broadly to mean they have access to all swap data retained by the repository – even when the data has no identifiable nexus to U.S. regulation. 

To illustrate the combined impact of indemnification and plenary access, let’s examine the case of two British banks executing a credit default swap in the U.K. involving a British underlying entity. Under the plenary access provision, if the trade was reported to a U.K.-based but U.S.-registered repository, U.S. regulators could claim a legal right to view data on this transaction – even though the U.S. regulator has no material interest in it. To compound the situation, the indemnification provision would require the British regulator to indemnify the U.S.-registered repository in order to access this same data – despite the fact that the entirety of the trade falls within the British regulator’s jurisdiction. 

Just as a U.S. regulator would not be inclined to have sensitive data on U.S. trades available to non-U.S. supervisors – or, for that matter, have to provide indemnity to access data that is rightly theirs to view – regulators globally consider this extraterritorial reach inappropriate and inconsistent with widely established and agreed upon data sharing practices.

Without clarifying language stating that access to data is limited to only those records in which the regulator has a material interest, it is likely that non-U.S. financial firms would avoid reporting their trade data to a U.S.-registered repository. The result: Fragmentation of swap data across countless repositories around the world.

If a regulator can only “see” data from the repository in its jurisdiction, then that regulator cannot see the whole market or risk building up in the system to provide adequate market surveillance and oversight. That is why Congress needs to resolve both indemnification and plenary access at the same time. 

The key to achieving lawmakers’ goal of mitigating risk in the OTC derivatives markets begins with ensuring that regulators continue to have the highest degree of transparency into OTC derivatives markets. And the key to achieving transparency begins with creating the proper environment for the development of a global trade repository system to support systemic risk management and oversight. 

Donahue is president and CEO of the Depository Trust & Clearing Corporation (DTCC), a non-commercial cooperative that serves as the primary post-trade infrastructure organization for U.S. capital markets.