Do we need Trade Repositories? Our new Financial Markets Infrastructure?

Join the community dialogue 01 Jun 2012 by Raghavan Guruswami

Do we need Trade Repositories? Our new Financial Markets Infrastructure? Do we know exactly what the problems are in financial markets? The answer may not be a ‘firm’ yes. Hence, we should not be in a hurry to fix solutions beforehand and create new institutions / intermediaries / infrastructures just to make things comfortable, desirable and easier. These new I I I s may turn out to be Frankenstein' Monsters in due course of time! I am not very much convinced as of now on the need for a central trade repository. I am emboldened to share my concern in the open after going through Chris’ latest blog “Clearing & Settlement : a coagulation of regulation” today covering the deliberations that took place in the Second Plenary meeting of CAG-WG in the London Stock Exchange on 30th May 2012. In the said meeting there was this particular thought provoking and challenging question – As we have never had a CCP failure, what is the issue with the CCP concentration risk? Of course, I raised this question for the first time and shared my concern, in a different perspective through my blog “Is there a possibility for Central Counterparty Risk to strike us?” in this SIBOS Community way back in Oct 2010! (Link https://www.swiftcommunity.net/communities/136/blogdetail/21353) Let us come back to the topic of the day - Do we need Trade Repositories? Our new Financial Markets Infrastructure? Trade repositories are to effectively capture and maintain ‘golden copy’ of OTC trades, preferably on real time basis and submit reports to regulators and emerging regulations like Dodd Frank in US of A and EMIR in European environment prescribe that. Such a repository is expected to be established as a third party market infrastructure just like clearing houses, stock exchanges. Our new financial market infrastructure, trade repository will serve as a centralized source for detailed trade transaction data comprising operational data, product information, counterparty information, underlie information, transaction information and event data. The repository will be expected to provide these data to various users like clearing house, regulators, users of market data and of course, our parties to the trade transaction. Fundamentally, trade transaction data is financial information and such financial information is ‘money’ for the participants in the market place. Decisions are made and positions are built and taken up basing on such financial information available in the market place. Hence the trade data financial information is classified as ‘highly secret’ and treated ‘very sensitive’ as it can create havoc if fallen into wrongful hands. What can happen if such vital information from trade repository falls into wrongful hands - Individuals, groups, or even countries? In these days of heightened cyber attacks and crimes, crooks and anyone with a ‘mission’ can cause a complete paralysis and create crises in the financial market place, which our regulators anyway want to avoid! I believe with such vital financial information on hand, the players can behave differently and exactly the same thing happened in the recent booking of huge losses by a leading financial institution in a OTC product operations. Having known the ‘open’ ‘outstanding’ position of this institution which was desperate to square up, the other market participants withdrew and this created liquidity problems further widening the exposure loss. I have yet another reason to subscribe to the topic of this post – Likes of ‘Olympic Games’ as played in Natanz, can be played on these repositories by the vested parties to achieve their ends and goals Of course, this is not the only base on which I want to argue in favour of my topic – Do we really need trade repositories? Our new financial markets infrastructure? If the need for the regulators is accurate timely and relevant information on OTC market operations, let the onus be placed on the players in the marketplace to provide them. By creating such new monolith repository organisations, we are only adding to the overall cost in addition to inviting fresh unforeseen problems leading to possible crises in future. You may agree.

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