04 July 2014

Risk.net: ESMA still unable to access US repository data

ESMA says it is still unable to access information held by US swap data repositories (SDRs) due to legal barriers in the Dodd-Frank Act. The restriction could limit its ability to monitor systemic risk and its capacity to gather data to define a liquid market under Europe's new trading rules.

Dodd-Frank requires foreign regulators to offer indemnities to US SDRs before they can access their transaction data. This was designed to protect US repositories from legal action if foreign regulators misused the data, but it also prevents European regulators from being able to access data held by a US SDR. Over the past few years efforts have been made by US regulators and politicians to rectify the situation, and it is understood that more recently US and European regulators have been in discussions about a memorandum of understanding (MOU) on the issue. To date, however, European regulators are still unable to access US SDR data – cutting them off from a crucial source of information to monitor the build-up of risk across the financial system.

"Currently, there is no international agreement in place. The European Securities and Markets Authority (ESMA) has no access to US SDRs because of the indemnification clause. However, ESMA and the Commodity Futures Trading Commission (CFTC) are discussing ways to address these issues," says a spokesperson for ESMA in Paris. Benoît Cœuré, a member of the ECB's executive board, warned that "privacy laws, blocking statutes and indemnification clauses which are in place in several jurisdictions" would "restrict effective access to the detail of OTC derivatives transactions". This could have major implications for EU regulators attempting to determine the true level of risk held by an EU bank with a sizeable foreign derivatives businesses, he warned.

"In the single supervisory mechanism, the ECB will be responsible for the supervision of large banking groups, some of which are global systemically important financial institutions with large derivatives businesses. The access to data relating to foreign subsidiaries of financial groups, where an authority – in this case the ECB – has supervisory responsibility at a consolidated level, is key to assessing the overall risk exposure of a given banking group," he said.

The liquidity definition will have a critical bearing on several of Mifir's primary objectives. In particular, it will be used to determine which instruments are forcibly migrated to an electronic trading platform. Data from the US, which has had a reporting regime in place for 18 months compared to Europe's three, is seen as important to this effort. If ESMA cannot obtain US SDR data, it will have to rely on market participants, who may not be able to provide all data due to client confidentiality restrictions. ESMA can access US SDRs' publicly available data, but this is patchy as the notional of large block trades is capped. Regulators have been working on the swap data indemnity issue for over three years.

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