OTC data under the microscope: Cleaning up derivatives data repositories

Error-strewn, duplicated and inconsistent – reporting of over-the-counter derivatives contracts data to trade repositories was supposed to lead to transparency and maintain global financial stability. As Jenny Nilsson, product marketing executive at triResolve, the portfolio reconciliation and reporting validation service from TriOptima, explains, that goal seems a long way off. The industry must proactively reconcile data with its counterparties and work together to ensure data accuracy.

Start making sense of the data 

An international consensus was formed when the Group of 20 met in Pittsburgh in 2009. International leaders agreed that transparency and oversight of the over-the-counter (OTC) derivatives market was key to international financial stability. One of the goals was that OTC derivatives contracts should be reported to trade repositories; the global regulatory community took decisive action to make that goal a reality.

With the introduction of data repositories and the specification of data required to be reported, regulators thought they would be able to understand aggregate exposure and risk in the swaps market. However, despite the significant resources spent by the industry on establishing swap data repositories and reporting to them, it is clear that simply reporting the data is necessary but not sufficient to achieve transparency and oversight. Problems persist: often, the data in trade repositories cannot be identified or matched against counterparties, incomplete information is reported and the integrity of the data is compromised. 

With reporting accuracy now in the regulatory crosshairs and financial and human resources limited, the pressure is mounting for a cost-effective, efficient solution for market participants to validate and align their data. 

Increasing regulatory scrutiny

In its advisory letter of November 17, 2015, the US Commodity Futures Trading Commission (CFTC) reminded swaps dealers and major swaps participants “of their obligations with respect to the data reporting requirements”. In the face of persistent reporting issues and failures, the CFTC emphasised that “accurate and timely information and data is essential to maintain a transparent and well-supervised swap marketplace”. Similarly, in February 2015, the European Securities and Markets Authority indicated that its “supervisory focus has now shifted to the quality of the reporting data”.

While the reporting regimes in the US (single-sided reporting) and Europe (double-sided reporting) differ, the regulators in both jurisdictions mandate that whether the market participant self-reports or delegates its reporting, it remains responsible for complying with the reporting requirements and ensuring their timeliness and accuracy.

The recent drumbeat of commentary from regulators in the US and Europe emphasises that now is the time to address the extensive inaccuracies in data reporting to ensure data integrity.

Errors persist

There are still many issues in the data being reported. These fall into several categories and include:

• Mistakes in core economic data
• Inconsistent reporting of identifiers
• Duplicative reporting of swaps
• Data reporting delays and omissions.

Identifying and fixing these errors is the way to clean up reporting data; the key is performing this task efficiently and intelligently. Achieving a holistic view of all data that has been reported in a firm’s name is proving a challenge in itself – when trying to align data with that of a counterparty, it becomes increasingly more complex. Add to that the challenge of data being reported in different repositories and jurisdictions and the task becomes enormous. The industry must come together and find a solution; the question is, how can this be achieved?

Leveraging existing efforts

Regulators and market participants alike have long identified the benefits of bilateral proactive reconciliation. Proactive reconciliation has been essential to minimising the number of collateral disputes market participants report under existing risk mitigation rules. The process is even mandated under global risk mitigation requirements – the European Market Infrastructure Regulation, Dodd-Frank, and so on. Bilateral portfolio reconciliation has been one of the real success stories of the OTC derivatives market, and leveraging this process will not only assist firms in improving the accuracy of regulatory reported data, but also benefit regulators when trying to make sense of the data in the trade repositories.

Proactive reconciliation of reported data enables trend analysis. If you reconcile your reported data daily and have the tools to log and investigate the differences you observe, over time you start seeing patterns in those differences. Once you understand where you regularly have problems, you can identify their cause and fix them upstream. 

One of the crucial components of this process is having a comprehensive break management workflow that is able to track the differences and assign root causes. As firms fix problems on a proactive basis, trade bookings and corresponding data will gradually align over time – aligning your own internal data with your reported trade is a first step towards improving the data. 

Equally as important is reconciling your reported record with your counterparty’s reported record. Benchmarking yourself with the rest of the industry can be difficult due to the fragmentation of data but should not be overlooked – this is an integral part of ensuring data accuracy. Firms must ensure they have a process in place that can ingest all types of data and reconcile it, no matter where it resides. 

The industry needs to come together in order to improve the data quality. This will help achieve the goal of transparency and oversight set out by the regulators, which will benefit the whole market and make the reporting regimes worthwhile. 

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