Congress erred in trying to make OTC derivatives trading more transparent because it wasn’t thinking of the global effect of the Dodd-Frank Act of 2010, says the clearing industry’s utility.
Depository Trust & Clearing Corporation (DTCC) officials say the error would “compromise” their efforts to build a global swap data repository (SDR). The flaw could hurt the confidentiality of these contracts, they say.
That’s because, DTCC says, Congress inserted a last minute Dodd-Frank provision to correct the problem, an access and indemnification provision. But the provision is unworkable, DTCC officials say. The provision calls for non-U.S. regulators to abide by confidentiality and indemnification requirements that are binding in U.S. law.
How?
“Global regulators, based on their status as a regulator, can go into a web portal on their desktop and they can get the detailed trading information on any contract that comes under their regulatory jurisdiction,” according to Dan Cohen, DTCC managing director and head of government relations. And because of the differences in legal systems between the United States and Europe, DTCC officials add, the ability to gather information could be hurt.
However, that provision is “unworkable as currently drafted and threatens to undo the existing system for data sharing,” DTCC says in a paper.
Indeed, most non-U.S. legal systems don’t have confidentiality and indemnification provisions, DTCC officials warn.
“The concept of indemnification is based on U.S. tort law. Many regulators worldwide have indicated that they would be unable or unwilling to provide an indemnity agreement as required under Dodd-Frank,” according to the DTCC paper.
That would lead more countries to build their own SDR and not share information. It would also hurt DTCC’s efforts to build a comprehensive SDR, the utility says, “fragmenting” data.
Why?
The proliferation of swap data repositories (SDRs) would fragment data. This, in turn, would impair the ability of regulators to act effectively globally during the next market meltdown.
DTCC is working with lawmakers, regulators, including the SEC and CFTC, to change the provision. It is also trying to pass a bill in Congress, H.R. 4235, “the Swap Repository and Clearinghouse Indemnification Correction Act of 2012.”
Cohen says it is difficult to pass legislation in an election year. However, he notes that the corrective legislation passed the House Financial Services Committee by voice vote and has “bi-partisan support” in Congress.
How did the controversial provisions of Dodd-Frank happen?
The provision was added in the last hours of the conference committee on Dodd-Frank. And the provision was not subject to a Congressional hearing, where it might have been changed, DTCC officials say. Cohen warns the provision could end up having the opposite effect of the law’s goal.
“The irony of this Dodd-Frank provision,” Cohen warns, “is that, if we don’t reform it, we end up with less market transparency than we have today.”
