The Depository Trust & Clearing Corporation says it is ready to launch a repository for trade data in multiple types of credit and interest-rate swaps, starting in the first half of October.
That is expected to lead to more derivatives business for institutional clearing brokerages. The establishment of swap data repositories is part of the Dodd-Frank Wall Street Reform Act of 2010’s mandates to move a wide range of swaps that had been negotiated and cleared on a dealer-to-dealer basis, into standardized contracts cleared centrally on exchanges.
Several institutional brokerages, including Goldman Sachs and Broadcort, have since set up new clearing units targeting this business.
The Commodity Futures Trading Commission on September 20 gave provisional approval to an application by the DTCC Data Repository to create and operate a multi-asset swap data repository in the United States. Chairman Michael V. Dunn said the unit of DTC would be ready to begin operation on October 12, the first day that reporting of swap data is required.
The repository will collect detailed “meaningful information” of the entire swaps market, a DTCC executive said.
“Even with clearing increasing, it’s recognized by the regulators that you need to have an entire sight of the entire market,” says Marisol Collazo, managing director, product management for DTCC Deriv/SERV.
“And I think it’s important to be able to see both cleared contracts and those that are never going to fall under the category of a clearable product and yet can have a significant impact on the market,” she adds.
While the reporting details of trades in credit- and interest-rate swaps to a repository is slated to begin on October 12, DTCC officials said trades between buyside firms in all other classes of over-the-counter derivatives, including commodity and currency swaps, and will start being registered in the repository in April 2013, she added.
The dealer-to-dealer model is still permitted under Dodd-Frank. That’s because some OTC swaps are so thinly traded that it would be difficult to clear them, in a public marketplace. These are exotic, custom-designed OTC derivatives contracts
But regulators are still in process of writing new OTC derivatives rules defining which swaps must be cleared. Those that don’t, the bi-lateral swaps, are expected to have stiff collateral requirements. That, they expect, will mean the bulk of OTC derivatives contracts will go through clearinghouses.
SDR, Dunn said, will be “an important step in implementing Dodd-Frank Act and helping to bring greater transparency to the OTC derivatives market.”
Clearing these often complex transactions in a clearinghouse, in which values are better understood than on a bi-lateral basis, is one protection against a recurrence of the disasters of 2008, regulators hope.
Said one clearinghouse official in the wake of the market meltdown: “The failure to properly measure and collateralize the risks of OTC derivatives had dire consequences.” (“OTC Derivatives Clearing Debate Heats Up,” CQ&D, Winter 2009)
The Dodd-Act Frank Act of 2010 encouraged the use of clearing as a way of lessening the danger of OTC derivatives dealer-to-dealer/bi-lateral model. This private model of contracting OTC swaps was one of the factors in the market meltdown of 2008, regulators and lawmakers said.