Swaps data face Brexit fragmentation

LONDON, Oct 13 (IFR) - Post-crisis attempts to shine a light on the over-the-counter derivatives market could be hampered by the UK’s departure from the European Union, because a requirement for London-based swaps data repositories to set up separate EU27 entities could fragment data and reduce the set of exposures visible to European regulators.

In an address to the European Parliament’s Economic and Monetary Affairs Committee, Steven Maijoor, chairman of the European Securities & Markets Authority called on trade repositories and credit ratings agencies to draft Brexit contingency plans as the slow pace of negotiations raises the likelihood of the UK departing without agreements in place.

“As a direct supervisor of credit rating agencies and trade repositories within the EU, with a number of entities headquartered in London, ESMA requires appropriate contingency plans from individual supervised entities,” said Maijoor.

Only two of the seven ESMA-registered TRs collecting swaps data under the European Markets Infrastructure Regulation are based in the EU27. Regis-TR, a joint venture between Clearstream and Spanish central securities depository Iberclear, is in Luxembourg, while KDPW in Poland operates a specialist repository for domestic financial instruments.

The Depository Trust & Clearing Corporation’s DTCC Derivatives Repository, which accounts for almost half of EMIR swaps reporting, is one of at least two London-based TRs likely to establish a separate EU27 entity to ensure pan-European coverage post-Brexit.

Unlike most of its competitors, DTCC already operates a multi-jurisdiction model with eight separate repositories including five across Asia-Pacific.

UnaVista, part of the London Stock Exchange Group, is monitoring developments and existing LSEG operations in Milan and Paris could become home to a separate repository should regulations require it.

Crucial to post-Brexit planning is ESMA’s definition of “operational separation” required for entities to continue activities under EU rules, such as EMIR. Many warn against a forced physical separation given the increased cost and fragmentation associated with multiple repositories.

“Large brokers want to keep the cost of trade reporting as low as possible through economies of scale,” said a regulatory expert on the subject. “One of the results of Brexit is that you might create fragmentation and reduce economies of scale.”

Earlier this year, the European Commission proposed new rules enabling enhanced oversight of third-country clearinghouses, with relocation requirements only for the most systemically important firms.

“That would be an interesting model to adopt in the area of trade reporting, not just because of the economies of scale you can derive from operations under a single roof, but one of the issues is data disaggregation when you have multiple repositories,” the regulatory specialist said.

Trade repositories were set up in response to the 2008 global financial crisis and intended to present regulators with a full view of derivatives risk in the financial system.

While swaps reporting is mandatory in most regimes, only two jurisdictions have so far agreed to share swaps data. The Australian Securities & Investments Commission signed a swaps data sharing agreement with the Monetary Authority of Singapore after ASIC licensed DTCC’s Singapore repository, DDRS, for derivatives reporting.

Such agreements are considered crucial if global regulators are able to properly assess risk, but some participants fear that Brexit could be a step back for data aggregation.

“Derivatives is inherently a cross-border business so the more you can aggregate data across borders the better,” said the regulatory specialist. “From a regulatory perspective there’s a benefit to keeping data in one place and Brexit could create the opposite, by disaggregating the UK from the rest of the EU.”

Credit rating agencies face similar pressures. The “big three” confirmed that they are assessing their European operations. Fitch expects to make limited adjustments and possibly expand some existing EU locations while Moody’s confirmed that it may need to build out or establish presence in some EU27 markets in response to market trends. S&P said that it is required to move its European headquarters to the EU and is aiming to minimise the impact on staff and operations.

Kroll Bond Ratings Agency has already confirmed that it will move to Dublin to continue an expansion of its pan-European operations.

UK-based financial infrastructure providers are flocking to Dublin, attracted by common law. The Central Bank of Ireland has been keen to establish the country as a hub for financial infrastructure firms, which have lower headcounts compared to banks. (Reporting by Helen Bartholomew)