August 19, 2015 / 2:33 PM / 4 years ago

Global tagging system proposed for derivatives trades

LONDON (Reuters) - Global regulators and central bankers have proposed a common tagging system for off-exchange derivatives transactions to spot more easily which banks could be at risk in a market crisis.

Regulators were left in the dark when Lehman Brothers went bust in September 2008, unable to see who was on the other side of the U.S. bank’s derivatives transactions, adding to uncertainty that fuelled a global markets meltdown.

Seven years on and regulators are still unable to get a reliable snapshot of each bank’s derivatives exposures which can straddle many borders in a $630 trillion market.

Off-exchange or “over the counter” (OTC) derivatives transactions, such as credit default swaps and interest rate swaps, are already being reported to so-called trade repositories or TRs.

But there are 26 of them in 16 jurisdictions with no system for aggregating the data or even ensuring the data is comparable.

The International Organisation of Securities Commissions (IOSCO) and the Committee of Payments and Market Infrastructures (CPMI) issued draft guidance for public consultation on Wednesday for a “unique transaction identifier” or UTI.

“The role of the UTI is to uniquely identify each OTC derivatives transaction required by authorities to be reported to TRs,” IOSCO and CPMI said in a statement.

The task is harder because rules differ from country to country regarding which transactions must be reported.

In the United States only one side of a transaction has to report while both sides must report in the European Union.

Several countries have already begun using their own versions of UTIs which differ in many ways, such in how “unique” the tag really is or who is responsible for generating it.

A snapshot of derivatives positions would not only aid regulators in a crisis but also help them spot and tackle a build up in risky positions to avoid banks getting into difficulties in the first place.

One official at a leading TR said the industry was facing costly, conflicting demands as market regulators want enough data to spot market abuses while central bankers want sufficient data for spotting risks to the broader financial system.

“That’s a tall order and it’s also not clear what should be aggregated,” the official said.

The guidance was called for by the Group of 20 economies (G20) in the aftermath of the 2007-09 financial crisis and is expected to be finalised in 2016.

Editing by David Evans

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