The global effort to make trading over-the-counter derivatives safer will be compromised if Congress doesn’t correct a flaw in the Dodd-Frank Act, says the clearing industry’s utility.
Depository Trust & Clearing Corp. (DTCC) officials say the flaw would "compromise" their efforts to build a global swap data repository (SDR). The flaw could hurt the confidentiality of these contracts, they say.
"Global regulators 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," said Dan Cohen, DTCC managing director and head of government relations. But because of the differences in legal systems between the United States and Europe, DTCC officials say, the accumulation of information could be inhibited.
DTCC officials say a last-minute Dodd-Frank provision to correct the problem is unworkable. The access and indemnification provision calls for non-U.S. regulators to abide by confidentiality and indemnification requirements that are binding under U.S. law. But the provision is "unworkable as currently drafted and threaten to undo the existing system for data sharing," the DTCC says in a paper.
Most non-U.S. legal systems don’t have confidentiality and indemnification provisions.
"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," the DTCC paper says.
That would lead more countries to build their own SDRs and not share information. It would also hurt DTCC’s efforts to build a comprehensive SDR, the utility says, "fragmenting" data.
The result?
The proliferation of swap data repositories would fragment data. That might impair the ability of regulators to act effectively globally during the next market meltdown. The DTCC is working with lawmakers and regulators, including the Securities and Exchange Commission and the Commodity Futures Trading Commission, 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 "bipartisan support" in Congress.
How did the controversial provisions of Dodd-Frank come happen?
The provision was added during the eleventh hour of the conference committee on Dodd-Frank and was not subject to a congressional hearing, DTCC officials say. Cohen warns that the provision could end up having the opposite effect of the law’s goal.
"The irony of this Dodd-Frank provision," Cohen said, "is that if we don’t reform it, we end up with less market transparency than we have today."
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