Depository Trust & Clearing is working to establish global trade repositories for five over-the-counter derivatives asset classes, and it met recently with regulators and other officials in Asia as part of that mission. The following is an edited transcript of an interview with Dan Cohen, managing director and head of government relations with DTCC, who discussed the unique challenges and time frames of financial reform for Asian nations.
What was the goal of your recent visit to Asia? Which areas did you visit, and with whom did you meet?
[Our outreach in Asia] fits into a larger picture for DTCC’s Government Relations department and the company. [DTCC's mission is to establish itself as a reliable supplier of global data and information and to serve as a resource for legislators and regulators worldwide on public policy issues related to financial services.] One of the major issues we are working on is the establishment of our global repositories for [five over-the-counter derivatives] asset classes. We are going to establish a mirror image of the data we hold in data centers in the three major zones of the world: North America, Europe and Asia.
[Asia is different from the U.S. and Europe because it consists of] multiple countries that don’t necessarily operate in concert with one another. Because derivatives are a global business, our goal is to try and find as much harmony as we can.
When it comes down to the core issues, Tokyo is often seen as the financial center of Asia, as it is the largest writer of derivatives contracts. We’ve spent time meeting with the [Japanese Financial Services Agency] to determine what type of regulatory approach it’s going to take. The JFSA [has the option, as established by Japan's legislature,] to have its own repository, or it could put the data in an offshore repository. [My impression is that] it’s very interested in having an offshore entity process the data. Our discussions were about how to accomplish its goals and our goals.
Hong Kong has made a decision to build its own trade repository. A question is whether the Chinese market will let others see its [renminbi] trades. [DTCC has had discussions with the Hong Kong Monetary Authority about developing a system that would allow trades to be reported through DTCC to the Hong Kong repository. The result should be a process that would allow DTCC’s global trade repository to receive the data it needs for more complete aggregation and still allow Hong Kong to have local data control.]
Singapore wants to be [an even stronger] financial center. By the end of the month, I expect to see its draft regulatory regime, which I have been led to believe will probably be fairly consistent with the regime designed by regulators at the OTC Derivatives Regulators’ Forum. [South Korea has an interest in repository issues as well.] China and India have rule-of-law issues, and they have a long way to go [in establishing their regulations]. Australians are very interested in activity in Asia and Canada, but they’re in early stages of their discussions.
Asian nations seem to have regulatory environments that are unique to each one, but what were some of the overarching issues you discovered in terms of financial reform in Asia?
The overarching theme is that everyone wants to have a global data set, [but having a data center in every market] is a very expensive proposition [and could lead to data fragmentation]. What we’re looking for right now is a regulatory environment that gives confidence to all regulators, not just local regulators, so that they’ll have access to all of the data they’re entitled to.
With regulators, the biggest issue when it comes into our space is indemnity [under a Dodd-Frank Act provision that appears to be a technical drafting error], under which third-country regulators would need to indemnify U.S.-based repositories in order to gain access to the data held in a swaps-data repository or a trade repository. It was intended as a way to protect the confidentiality of data, but its application has the potential to lead to data fragmentation and a loss of transparency into OTC derivatives markets. There is also concern about the perceived extraterritorial reach of the U.S. law.
[DTCC also heard questions] over the interpretation of Dodd-Frank by U.S. regulators under which if a swaps-data or trade repository had any data in it that had a U.S. nexus, then all data in the repository would be available for review, and the repository might have to register in the U.S. as a swaps-data repository. That interpretation is broader than the global community tends to agree with [and creates an environment for data fragmentation].
The U.S. is not the largest player in the derivatives market, and that’s something that is important to remember. The U.S. writes about 25% of the derivatives contracts, and about 60% of the contracts are written in Europe. The Asian market is relatively small. It’s 8% to 10% of the market, so the paradigm is different over there. They’re far more interested in harmonization.
How do the time frames in Asia relate to those in U.S. and Europe?
The U.S. got it done first [with the Dodd-Frank Act's passage]. The European mantra was, “The U.S. got it done fast; Europe’s going to get it right.” The Europeans are finishing their legislation [before the first quarter ends]. The Asians appear to be adopting their regulations this spring. All of us have a Group of 20 commitment to complete our processes by Dec. 31. DTCC is working to have our trade repositories receiving data by then, and we are very comfortable we’re going to meet our time frame.