10:31 am - Wednesday June 28, 2017

SDRs – Emerging Intermediaries in US Financial Markets

Clarification: For the purpose of this discussion, SDRs are not Special Drawing Rights. They are Swap Data Repositories.

Swap Data Repository, a Financial Markets Intermediary, is an entity that will be expected to maintain a centralized electronic record of swap transaction data. SDR has emerged and grown in importance thanks to the initiatives and rule making processes under Dodd Frank Act.

By centralizing the collection, storage, and dissemination of data, a well designed Swap Data Repository with effective risk management and controls can play a very important role in ensuring transparency and availability of information to regulators and other stakeholders, promoting greater financial market stability and supporting the detection and prevention of market frauds and abuses.

A well founded, clear, transparent and enforceable legal basis and governance framework that are clear and transparent are the minimum basic requirements to enable SDRs to support the stability of the financial market place. They are also expected to have approaches for comprehensively managing legal, credit, liquidity and operational risks.

A SDR may typically serve as a single source of information for a particular market, and it may also be the central registry for certain trades. Therefore, a SDR’s failure to perform as expected could cause significant market disorder and disruption. Deficiencies in business continuity arrangements, data integrity, and data safeguard and security can lead to disturbing situations such as these. Inadequate disclosure or faulty or delayed data delivery by a SDR to regulators or other stakeholders could undermine the primary purpose of the SDR.

Access to timely and reliable data provides greater insights and improves the ability to oversee the markets and its participants. Data recorded by a SDR may also be utilized as input by the participants and potentially by other intermediaries and service providers like exchanges, electronic trading venues, and conformation or matching service providers. Therefore, continuous availability of accurate data is crucial.

A SDR should carefully assess the operational risks to ensure the scalability and reliability of IT and related resources. A SDR may establish links with another SDR or with other stakeholders such as a CCP. Such links may expose the linked stakeholders to additional risks if the systems are not properly designed.

The mitigation of operational risk is particularly important because the information maintained by a SDR can support other critical activities in trade processing provided either by the SDR or by other service providers. The other stakeholders establishing a link to a SDR should ensure that the system and communication arrangements between the linked entities are reliable and secure such that the operation of the link does not pose significant reliability and security risks.

In addition, a SDR may provide friendlier terms of use that are commercially reasonable and aim to support interconnectivity with other stakeholders and service providers, where requested, so that competition and innovation are not compromised and impaired as a result of the centralized recordkeeping activity.

A SDR may not engage in anti-competitive practices such as product or service tie-up, employing contracts with non-compete and exclusivity clauses, overly restrictive terms of use, or anti-competitive price discrimination, etc. A SDR should also not develop exclusive proprietary interfaces that result in compulsory lock-in or barriers to entry with respect to competing service providers that rely on the data maintained by the SDR.

For a SDR to be effective, its goals and objectives should include timeliness and accuracy. A SDR should promptly record the transaction information it receives from its participants. To ensure the accuracy and currency of data, a SDR should employ timely and efficient recordkeeping procedures to document changes to recorded transaction information resulting from subsequent transaction events.

Ideally, a SDR should set a service-level target to record information it receives from participants in real-time. A SDR should have in place procedures and timelines for making data available for any downstream processing and should implement quality controls to ensure the accuracy, validity, and integrity of the data it stores and disseminates.

A SDR should have robust information systems that provide accurate current and historical data. Data should be provided in a timely manner and as an additional service, in a format that permits it to be easily analyzed. At a minimum, a SDR should provide aggregate data on open and closed positions and transaction volumes and values and categorized data (for example, aggregated breakup of trading counterparties, reference entities, or currency and time or term breakup of products), as available and appropriate.

One of the primary benefits expected of a SDR is improved market transparency and the provision of data to regulators and the stakeholders in line with their respective information needs. Timely and reliable access to data stored in a SDR has the potential to improve significantly the ability of regulatory authorities and the stakeholders to identify, evaluate, manage and monitor the potential risks posed to the broader financial system.

Another important benefit of a SDR is its promotion of standardization through the provision of a common technical platform that requires consistency in data formats and representations. The result is a centralized store of transaction data with greater usefulness and reliability than when the data are dispersed and ill organized.

As market infrastructures continue to evolve, SDRs may develop for a variety of products and asset classes both within and across particular jurisdictions, and cooperation among authorities will become increasingly important. Efforts may also be made to remove any legal obstacles or restrictions to enable appropriate, effective, and practical access to data by relevant authorities with adequate safeguards.

Way to go

Building a new SDR system is a notoriously complicated process, especially if it is intended to provide dynamic real time service and support. The players must be clear about their objectives when building a new SDR system. This is not always as straightforward as it sounds. Different levels of complexity can be employed and encountered in the SDR

Players that choose to adopt a more sophisticated approach to a SDR also face a more complicated data requirements. In fact, the biggest operational challenge in implementing a SDR system may always be the data. SDR is a trade repository and such trade information must be collected and aggregated across the different systems. Other requirements like Netting and collateral arrangements, which are rarely stored in the same system as the trade data, must also be pulled in to the repository.

Going forward possibilities exist for managing traders’ behavior by employing SDR inputs as part of the front office pre trade processes and approvals. Therefore, the system must support real time incremental SDR data impact analysis and be capable of computing too. Speed and scalability are other critical components.

Building a state of the art system with complete support for all possible functionality and data elements is a daunting proposition, especially if the attempt is made from scratch. Organizations that may want to install a state of the art system from the outset will find the SDR an evolving concept. As practice and regulation evolve, new techniques will emerge and technology will become more available and accessible. Build for today with an eye on tomorrow may therefore turn out to be the best approach.

Above all, our SDR system must be flexible. There are still a number of uncertainties around SDR. Some of the specifics of the regulatory requirements are still unclear and such is the nature of the current regulatory initiatives (may be our regulators are also learning in the process) that it is hard to predict how prescriptive or liberal future legislation will be. Systems must be flexible and scalable enough to handle not just today’s requirements but new demands as market practices around SDR further develop

The shifting picture of regulation and the sheer processing power required to run a complete and comprehensive Swap Data Repository makes the effort costly and difficult and highly challenging. However, a full-fledged and focused financial technology player can deliver fast, accurate Swap Deposit Repositories at lower cost, pioneering and powering a more accurate and timely availability of dynamic data in real-time.

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