CPMI-IOSCO: At Last, Harmonisation of OTC Derivatives Data

Thomas Murray has always understood and supported the value of bespoke OTC derivatives contracts, which meet highly specific economic needs not found in the regulated marketplaces. What cannot be overlooked, however, is that OTC derivatives contributed significantly to the Global Financial Crisis of 2007-2009. One factor behind this contribution was the poor information on bilateral positions. Contracts had not been confirmed with counterparties, different terms were noted on contract notes, and on and on the information gaps went: there was no overall picture in the autumn of 2008 as to who owed what to whom, and what a given counterparty’s positions and ability to meet its commitments were, not to mention the sudden realisation that nobody knew the true value of the contacts. And so the OTC markets largely froze.

Among the policy decisions taken at the G20 Pittsburgh Summit in 2009 was that OTC derivatives that could be standardised should be centrally cleared, a mandate that went into effect several years later. (The policy misnomer and resulting misconception were that bespoke and standardisation were compatible, reconcilable types of contracts.) In the years since, OTC derivatives continued to play their role, centrally cleared or not, and positions in those instruments were meant to be reported to a new financial market infrastructure called a Trade Repository (‘TR’).

The first TR had been set up in the mid-2000s by DTCC in New York, in order to confirm contracts and, as such, act as a warehouse for the various data points therein; however reporting was not mandatory. Post-Pittsburgh, there was a model, at least, for exchanges and other actors to set up their versions of TRs to meet the challenges and business potential of this new global policy mandate.

What was Thomas Murray writing and doing as TRs were set up?

Thomas Murray was a supporter in those years of establishing TRs in the key jurisdictions around the world where OTC was most active. The firm’s position reflected not only its expertise in infrastructures, but also its strong conviction that clearer data sets on what had been among the more problematic asset classes during the global financial crisis was bound to be a good step to shore up systemic financial stability.

Thomas Murray commented extensively on the public consultations set out in 2012-2014, emphasising the value to the market of taking up this mandate seriously. It did mean more reporting, but none of us wanted to return to the frozen markets of 2008-2009 – and it was quite clear by then that governments were going to be firmer and close the public purse the next time financial institutions ended up stuck with positions they could not manage.

But TRs were born with a flaw that has rendered them nearly useless since reporting to them became mandatory four or five years ago, depending on the jurisdiction. That flaw was the lack of guidance from the authorities as to how to present standardised data that could be combined and analysed across asset classes and TRs, in order to aggregate an institution’s open positions across multiple markets. And institutions therefore chose to define their data as they pleased, and to transmit them as they chose.

This inability to set standards for information gathering was also true of the authorities: the European Union mandated two-sided reporting of contracts, while the United States mandated single-sided reporting. As Thomas Murray had argued, differences in data fields and data transmission to TRs meant that the numbers could not be directly added up. The authorities receiving TR data had to do a lot of frustrating sifting of these numbers relative to the knowledge of the market that hard work garnered.

Even before the TR mandate went into effect, Thomas Murray managers called on authorities in London and Washington, and global authorities at IOSCO, the Basel Committee, and the Financial Stability Board, arguing for standardisation of data sets and the formats for their transmission to TRs. How else was this going to work? The problem coming was evident: the reader must remember that global banks lost track of their own positions, just like everybody else.

What might Thomas Murray suggest?

Thomas Murray would suggest today what it suggested at the start of this decade, that clear data sets on OTC would be critical for the capital market authorities and central bankers to have for their market oversight responsibilities. What parts of these data sets should be made available to the market itself, in what form and in what detail, would be the next question to ask – once the authorities have clear information to share.

The Technical Standards now promulgated

The CPMI-IOSCO Technical Guidance is appropriately detailed, underscoring how these past years of transmitting incredible volumes of numbers could not have made sense without guidance from on high.

Once these technical standards are implemented, the data will have standardised formats and numerical order to follow, as the one example below shows for the beneficiary of a contract. The entire text prepared by CPMI-IOSCO has some 100 pages of formats, and so should be able to meet the complexities of the environment and capture the data in a usable way.

Where the CPMI-IOSCO Technical Guidance goes from here

The Technical Guidance appeared on 9 April 2018, more than three years after the authorities’ working party to standardise OTC data began its work. What is most worrying is that most of the authorities have not admitted to the fundamental failure precipitated by this lack of guidance– years of gibberish data were gathered. The market knew that, though it was hardly something to speak about too loudly in public; and the capital markets authorities and central bankers overseeing market stability protested too loudly that they were making progress in understanding OTC.

That the authorities have been unable to compile clear aggregate data sets from TRs and reporting central banks was amply demonstrated by the paucity of OTC statistics prepared by the Bank for International Settlements. The statisticians Thomas Murray spoke with in Basel were appropriately reluctant to aggregate and present to the public numbers that were not clean.

Setting up the TRs as was done was so evidently wrong in its approach as to make one wonder how the authorities missed the point. That would be a matter for a financial historian to take up.

We close with the fundamental thought Thomas Murray analysts asked themselves throughout: why could there not be one global non-profit institution that could be set up as a public service utility to capture the data in one place, now at last in standardised form?


The author, Thomas Krantz, is Senior Advisor, Capital markets, in the firm of Thomas Murray; and served as Secretary General of the World Federation of Exchanges (2000-2012). The views expressed are his own, and not necessarily those of the firm.

Tags: CPMI-IOSCOOTC DerivativesCentral CounterpartiesTrade RepositoryTRG20DTCCIOSCOBasel CommitteeFinancial Stability BoardCPMIRiskTechnical GuidanceCounterparty RiskRisk Monitoringcentral clearinggovernance