Trade reporting is intended to provide regulators with insight into the market, but how can multiple reporting centres provide a single view? Dan Barnes reports on how Canada is approaching trade reporting across the provinces.
On 13 November 2013, an extremely rare agreement was witnessed between US market and infrastructure operator CME Group and US post-trade giant the Depository Trust and Clearing Corporation (DTCC). The issue was the introduction of competition between trade repositories (TRs) by authorities in Europe.
“I don’t think competition is useful for client reporting,” said Daniel Jude, director for client development & sales to Asset Managers, EMEA, CME Group, speaking at the Mondo Visione World Exchange Forum in London.
“We also think competition was not the best result,” said Andrew Douglas, head of Government Relations, Europe and Asia, DTCC. “We agree with the CME.”
Their grievance with the European model is that clients, who may or may not delegate reporting to a counterparty, are provided with a choice of where to report trades. Repositories compete to receive those reports and must therefore provide some differentiation from one another. As a result, the single view of the market is unpicked regulators must follow many different threads to try and weave a single picture of the market.
“You cannot identify systemic risk easily if the information you need is held in several different places,” said Douglas. “Even the Financial Stability Board (FSB) argues that competition is not a good thing.”
Canada now faces a similar dilemma. Trade reporting for over-the-counter (OTC) derivatives will begin in July 2014 across the provinces of Ontario, Manitoba and Quebec with others working through the legislative process to be able to adopt similar rules. The Bank of Canada is said to be paying a lot of attention to the TR rules, and has specific interest in how the authorities are going to aggregate and make use of the TR data. The fact that the provincial commissions have taken a unified approach in terms of coming up with rules that are substantively similar has been welcomed by market participants and observers alike.
However harmonisation between regulators does not mean that there will be a single repository.
“In the near term, every regulator you talk to would prefer to have one TR,” says Derek West, senior director, derivatives oversight, Autorité des Marchés Financiers (AMF). “We have some control over that as TRs must be recognised by us to be approved so if we were to recognise only one, then that is the only repository. However that scenario doesn’t seem likely given there are different products around energy and interest rates, and different firms like CME providing their own. It is inevitable that you will have more than one.”
Pulling together
For Canadian authorities this situation may undermine their ability to manage or reduce systemic risk.
A spokesman for TMX Group, whose subsidiaries include Toronto Stock Exchange, Montreal Exchange and the Canadian Derivatives Clearing Corporation says, “Without comparing regulatory regimes, in general terms, data fragmentation can introduce real risk and negatively impact the decision-making process, when there is an attempt to reconcile multiple sources.”
Reconciliation could be delivered by an aggregator, which would source information from across the TRs, then standardise and display a consistent representation of activity across the market.
In May 2013 the AMF, Quebec’s financial regulator, issued a request for information (RFI) to build a market analysis platform (MAP) that would encompass such an aggregation function. It asked for input from suppliers to develop an MAP that would support the AMF and “potentially other Canadian securities authorities” by tackling three issues:
• The creation of a central data repository that would hold a wide variety of securities market information required to be available to various regulatory activities, possibly across Canada.
• The provision of a toolset to populate and interrogate the data repository, to analyse and visualise its contents, and to support the later creation of a variety of functionality supporting these regulatory activities.
• Utilise the data repository to create specific functionality for the retrospective assessment of market activity and associated data to detect and investigate cross-product and cross-venue trading anomalies, in particular for the detection of possible illegal insider trading and market manipulation.
West says that the project could support the TR role but it is intended to be a larger development.
“Trade repository data is one component of that system,” he says. “The RFI was to create an aggregation and more than that a surveillance tool. TR data will definitely be one of the sources of data for that but we are also looking to get the exchange data, and from Electronic Communication Networks (ECNs) and Alternative Trading System (ATS) entities. TR data would be a supplement to that but initially I don’t know if it is envisioned as the way to aggregate TR data for our immediate analysis. I think that could be a longer term project.”
“My view on creating a data aggregator is that it is a good idea,” Donna Bales, managing partner of Balmoral Advisory Group, a boutique capital market advisory firm. “Canada is fragmented on province-to-province basis. An aggregator would centralise all the trade data across all asset classes and allow for cross product analysis and market surveillance.”
A single solution
Market participants report that AMF’s RFI had a requirement for a system that handled just 50 OTC reports per day, giving a measure of the modest challenge that Canadian regulators may face in pooling data.
“Canada is not a huge market so the economics of some large international participants doing something – it may not be worth their while,” says, Phil Wright, managing director for Canadian sales at trading platform CanDeal. “In Canada ideally we would like to have a local repository with responsibility for distributing to the other global repositories. I think that is where we are going.”
Although the project was said to be conducted in harmony with the Canadian Securities Administrators (CSA), a body formed of regulators from across the ten provinces and three territories, the optimal model of ownership is still open to debate.
“Conceptually a unified or centralized trade repository is a good idea and ought to be considered but there are issues to consider around ownership – who should be responsible for it?” Bales asks. “A national regulator was announced in September with British Columbia and Ontario supporting a ‘co-operative’ regulator based in Toronto with one set of rules. If that were to happen, with their mandate being to manage systemic risk, perhaps [the MAP] should sit with them.”
“Other regulators who house trade data in Canada may also want a voice at the table. So although the optimal solution is clear, there is still work to be done.”
There is an aggregation feasibility study group set up by the FSB that is looking at different options for aggregating data across national authorities and The Bank of Canada and provincial regulators are participating in that group.
A source close to the bank said, “Fragmentation is a fact and we are just going to have to figure out a way to deal with it.”
Individual national authorities have different approaches but many are in wait and see mode. At present there are no trade repositories registered in Canada, as is the case in many other countries. Without insight into the type, size and sources of data, some central bankers are wary to commit their resources to national solutions.
In the meantime, the challenge of fragmented data could lead to a revision of the fragmented regulatory model that exists in Canada.
