Over the past few weeks, I spoke to eight sources about the incoming regulatory reforms for reporting over-the-counter derivatives, the global efforts to harmonize rule books, and how they will impact the industry and shape market structure. At the end of each interview, I asked them, “Could we ever see a single global trade repository?”

The consensus? “Not a hope in hell!”

Before I explain why, let me backtrack a little for some context. The need for a utility trade repository (TR)—or swaps data repository, as the US equivalent entities are known under Commodity Futures Trading Commission (CFTC) rules—has been debated since the initial introduction of global rules for reporting over-the-counter derivatives under the US’s Dodd-Frank Act of 2010 and the European Market Infrastructure Regulation (Emir) of 2012.

To financial firms, an industry utility makes sense: a centralized data repository could offer capital market participants the opportunity to reduce costs and improve efficiency in back-office tasks that are only cost centers with no differentiating potential. Everyone must do them in isolation, so why not pool those resources? But of course, if it were as easy as that, a utility would exist by now.

In 2012, big questions divided the industry. Would this utility be run by the industry or an entity like the Depository Trust & Clearing Corporation (DTCC)? Should they be run on a cost-recovery or a for-profit model? How many firms would have to participate for such a solution to count as a utility?

“There was a lot of discussion on having a single TR when they brought out the European rules,” says Glen Sinclair, who spent more than two decades at Royal Bank of Scotland in several project management and regulatory roles, and is now head of customer success at Finbourne, a UK-based provider of data management solutions.

At the time, Sinclair says, many banks in the EU were in favor of a single provider model. Emir’s reporting model is dual-sided, meaning both counterparties to a derivatives contract had to report if they were in scope of the regulation, and both sides had to make sure they were reporting the same data. Many banks wanted one provider because they were concerned that if each counterparty reported their side of the trade to a different TR, it would prove challenging to match and reconcile trades. Another complicating factor is that each TR uses different methodologies for ingesting, standardizing, and validating data.

How it works today is that if a TR cannot find the other side of the trade, it can request the information from other TRs. If data points like Unique Trade Identifiers or Legal Entity Identifiers still don’t match up, the providers must inform their reporting counterparty to resolve the discrepancies. Okay…and pause for breath.

A decade on, pairing rates for Emir reporting in the EU are still only at 60%. And to no one’s surprise, regulators aren’t happy about this.

Enter regulatory reform. In the upcoming changes over the next two years—the CFTC’s rewrite of its swaps data reporting rules and the Emir Refit—global regulators are expected to harmonize their rule books for OTC derivatives to improve reported data. They will be adopting common standards like Swift’s ISO 20022 and critical data elements. It’s important to note that several global regulators have also signed memoranda of understanding to collaborate more closely and share information related to OTC derivatives reporting to better fulfil their supervisory responsibilities.

This drive toward global harmonization has again prompted some market participants to broach the subject of the need for multiple TRs globally to become one centralized repository—and, again, regulators are trying to consolidate reporting efforts and use common standards and processes.

One trade reporting lobbyist says the topic of a utility service model and a single TR has resurfaced and percolated into some of his recent conversations with market participants over the past year.

“That level of regulatory view, where regulators are seeing into people’s systems or when everyone’s on distributed ledger technology, or there’s one repository to rule them all. I’ve heard it discussed recently,” they add.

It’s also worth mentioning that the market has seen a significant amount of consolidation over the last three years across reg reporting and TRs. As we’ve reported previously, it’s a tough gig to run a sustainable business in this space and many—such as the CME and UnaVista—have thrown in the towel by winding down some of their units. Yet there is one recent exception to that trend. This year, industry veterans founded a startup called Kor Financial, which became the first SDR to be approved by the CFTC in eight years.

The DTCC is by some distance the most dominant TR and SDR, and the strongest candidate to host a central utility. For one, the corporation—itself established as an industry utility for clearing and settlement—has a strong global presence in trade reporting. For instance, it offers a global trade repository for derivatives and securities financing transactions for global markets.

Some sources say the DTCC once appeared interested in providing a central utility. In a report in 2012, it stated: “The ultimate aim is to help regulators around the world manage systemic risk by providing near real-time access to OTC derivatives data from a single comprehensive source, and to give market participants the ability to meet reporting requirements in multiple jurisdictions using one system.”

A DTCC spokesperson confirmed that the firm’s decision to provide multiple trade repositories, both within a single jurisdiction and globally, aligned with individual jurisdictional requirements from regulators and enabled market participants to meet their obligations under trade reporting rules.

When asked directly if it would be accurate to say that the company never wanted to be a global utility TR, they declined to comment.

Pie in the sky

So, wouldn’t it make sense to have a single endpoint for everyone? Or could we ever see a global utility model? Again, the answer is “Hell no!”—and here’s why.

First off, we don’t have a global regulator, and we never will.

Secondly, to reiterate, the DTCC was set up as an industry utility for clearing and settlement, they are the most dominant TR and SDR, and they do have a global footprint. If the DTCC can’t do it, who would be able to fill those shoes?

“DTCC’s original business plan to have a single database [for supporting] a single global trade repository never got off the ground because you don’t have a global regulator, and each regulator wants the data onshore to them so that they have complete control and oversight over it,” says Jonathan Thursby, CEO and founder of Kor Financial. (The DTCC spokesperson also declined to comment on Thursby’s portrayal of the company’s business plans.)

Despite regulators’ harmonization efforts, there are still many differences, preferences, and nuances in how counterparties in one jurisdiction report the data compared to others. Virginie O’Shea, CEO, and founder of Firebrand Research, says that even after the CFTC and EU’s rule changes, there will still be about 48% divergence in reporting requirements between the rule books of the CFTC and the European Securities and Markets Authority. The International Swaps and Derivatives Association estimates there will be roughly a 30% divergence when using its Common Domain Model, a library that can be used to translate rules into machine-readable code. This is according to internal research, seen by WatersTechnology, and conducted by the trade association as part of its market outreach for its Digital Regulatory Reporting project. 

“In Europe, we also tend to be very prescriptive on stuff, so when the regulations are not aligned, they are really not aligned. So, it would be challenging just to have one TR,” O’Shea says.

A single, centralized global repository is “never going to happen,” she adds.

Jurisdictional differences are not the only hurdle to contend with. Within the Emir Refit, individual TRs can at their discretion include their own extra data fields for reporting. These can be incorporated as additional validation requirements requested by the TR to ensure the reported data is accurate.

Vinod Jain, a strategic advisor at consultancy Aite-Novarica, agrees that the global markets are too diverse and their needs are too different to operate under a single global TR.

“There is always this view that a single trade repository would solve everything. But time and again, we have seen that does not work,” he says. “You could also make the case to say, ‘Why can’t we have a single clearing and settlement backbone across the globe?’ Because the markets and the market dynamics are different; the local needs, the local regulators’ views, and the industry players are different.”

Risky business

With any utility service, there’s always the risk of a single point of failure. Having one market structure firm responsible for capturing the world’s trade reported data for OTC derivatives, managing it, governing the systems to support those services, and operating as the gateway to regulators’ view of the markets is a huge task and one that comes with significant risk.

Sinclair spells this out: “What if that TR is a bad service provider or gets into difficulty? Or how much does the regulator want to own and support that thing? Because without it, they become blind.”

But in a world with multiple TRs, that risk is spread across various infrastructures, datacenters, security systems, and jurisdictions. Not to mention there is also a host of data privacy and security concerns to contend with when it comes to pooling multi-jurisdictional data into a single global data repository or ensuring all those jurisdictions follow the same methodologies for reporting that data.

And there is also the risk that firms with a monopoly over the market lack the incentive to innovate. If you are the only player in town, where is the motive to invest in your technology and services?

Connecting the dots

Where it makes sense to pool resources is across rule books but within individual jurisdictions. Trading desks are merging and becoming multi-asset: the same should apply to visibility across data reporting. Regulators would be better informed if they could more easily connect the dots across different reporting regimes.

“What’s needed is not the global trade repository model, but all this information collected from the TR and SDR businesses to align with other regulations to get a holistic picture,” Jain says.

For instance, he says, the US Securities and Exchange Commission and the CFTC could better understand their relative markets and their idiosyncratic risks if they could pool their data. The same could apply to Esma and the 27 National Competent Authorities in the EU if they pooled data from different regimes such as the Markets in Financial Instruments Directive II and Emir. Some work has moved in this direction—in Europe, for instance, the Isin is used for both Mifid II and Emir reporting.

So, while having a single global TR might seem like a utopian model to some, most accept it will never happen. The industry is finally moving in the right direction towards harmonizing rules, however, encouraging some sharing of the burden across jurisdictions and trying to improve matching rates.

The next step could be for regulators to consolidate these efforts and insights across internal regimes and asset classes to gain a better understanding of the markets they govern.

“I think that’s what is truly missing,” Jain says. “That is what the regulators are looking for in terms of understanding the meaningful impact [on the market].”