FOW Learning - Global trade repositories: What they are

When it comes to better understanding the derivatives market, enhancing transparency, highlighting potential market abuse, and improving risk management and ensuring compliance, trade repositories play a key role – particularly for regulators and other authorities.

These entities, which collect and maintain records of trades, can operate on national, supranational or international scales, the latter being known as global trade repositories.

In this article, we’ll look at the trade repository definition and their purposes and functions, as well as the challenges and limitations they face and their importance in understanding the financial system.

What are trade repositories?

A trade repository is defined by the European Securities and Markets Authority (ESMA) as “an entity that centrally collects and maintains records of securities financing transactions.”

In other words, trade repositories, sometimes also known as swap data repositories, operate as centralised databases that collect and hold records of derivatives trades, helping regulators monitor the build-up of systemic risk. So, a trade repository will validate, store and match transaction reports, making them available to both regulators and the wider public – as aggregated and anonymised data.

Because they play a key role in improving the transparency of derivative and securities financing markets, they’re heavily regulated by government agencies that look after financial market supervision.

Generally speaking, a trade repository will operate on a smaller scale, covering trades in a single country or jurisdiction. Therefore, it will make data available to local regulators, ensure that traders are adhering to local regulations and offer an insight into local market risk. Examples include CME in the US and REGIS-TR in Europe.

Global trade repositories operate in the same way, but on a broader scale. They collect data from multiple jurisdictions to give a worldwide view of market risk and ensure adherence to international regulations.

What’s the purpose of a global trade repository?

Global trade repositories serve multiple purposes, all of which fundamentally come together to improve market transparency and give an insight into risk. The following are among the primary purposes:

• Increase overall market transparency: Global trade repositories give both regulators and traders a clear insight into activity in the market across the world.

• Identify and assess risks: They help with identifying risk across the market, allowing players to act before the situation becomes more serious.

• Monitor market activity: They help regulatory bodies detect unusual activity, abuse or fraud.

• Make analysis easier: Global trade repositories standardise data, organising it effectively and comprehensively, to aid in analysis.

• Ensure compliance: They help traders meet their requirements in reporting trade across different jurisdictions.

• Enhance global trade and collaboration: Regulators across different jurisdictions can better work together to allow for greater financial stability on an international scale. Take the European Securities and Markets Authority, which has responsibilities for the registration, supervision and recognition of trade repositories, per European regulations.

• Aiding in new policy formulation: The insights gained from the data trade repositories collect can inform the development of new policies and policy adjustments to help prevent issues in the future.

• Develop economic research: When data from trade repositories is aggregated and anonymised, it can be used by economists in areas of study including market dynamics and the effects of changes in regulation, which could benefit future regulatory proposals.

What are the functions of global trade repositories?

There are many purposes of global trade repositories, and there are several functions they perform to achieve them – the main one being to aggregate data for the benefit of regulators – as follows:

• Collect and report information: Global trade repositories collect data from reporting firms, which generally include financial institutions and similar entities, including banks, investment firms and hedge funds.

• Standardise data: They standardise and validate data, ensuring its accuracy and rework trade data into a consistent format.

• Keep records: Trade repositories keep secure records of all trades over a long time period.

• Share data with other repositories: They share data with other repositories and regulators across the world, meaning greater collaboration from jurisdiction to jurisdiction.
  

Why are global trade repositories important?

Trade repositories received greater attention following the 2008 financial crisis, after which there was seen to be a lack of transparency in the over-the-counter derivatives market. Therefore, it proved difficult for regulators to monitor counterparty risk and interconnectedness.

In September 2009, the G20 nations pledged to reform the over-the-counter derivatives markets. They agreed that all transactions should be reported to trade repositories in efforts to improve transparency and mitigate market risk. Regulations mandating the reporting of these transactions included the Dodd-Frank Wall Street and Consumer Protection Act in the US and the European Market Infrastructure Regulation in the European Union.

Before the use of trade repositories became widespread, there was no single body collecting information about derivatives trading. So, if two financial institutions had been trading extensively with each other as well as other entities, and one found itself in financial trouble, it would prove difficult for regulators to determine its exposure across all of its contracts.

With the widespread adoption of trade repositories, these financial institutions would have to report details of every transaction. So, if one experienced issues, regulators would be able to access the data held by the trade repository. As a result, they’d be able to understand the potential issues and knock-on effects, intervening and mitigating the potential risks.

In future, there may be scope for global trade repositories to incorporate artificial intelligence and more advanced analytics to further help regulators identify risks, flag potential market abuse as they aim to keep up with increasingly complex derivatives markets.

What data does a global trade repository receive?

Trade repositories receive large volumes of data which they then organise and standardise. The data they receive about a given transaction will include the following:

• Transaction type – e.g. futures, options, forwards or swaps.

• Counterparties – the entities involved in the transaction, and these will usually be identified by a legal entity identifier.

• Notional value – simply, the value of a derivative contract.

• Maturity date – this refers to when the contract expires.

• Pricing details – these may include the underlying asset prices or interest rate details.

• Collateral – data on any securities or cash used to protect the lender.

When trade repositories aggregate this data, regulators can analyse it to identify risk and abuse, calculate market exposure, and weigh up the chance for contagion – the spread of market disturbance from one jurisdiction to another.

What are the challenges of global trade repositories?

While global trade repositories play a key role in enhancing transparency and managing risk in derivatives trading, there are challenges and limitations to their functions and purposes – including the following:

• Ensuring data consistency and quality: It can be difficult for global trade repositories to ensure that data is accurate and consistent across numerous participants in multiple jurisdictions. This is because there can be variations in reporting standards, interpretations of requirements, and data formats. There are also sometimes legal barriers to sharing comprehensive transaction data across borders.

• Allowing for data usage and access across borders: Legal and technical difficulties can make it more difficult for different authorities to access the information they need, even if regulators themselves have access to the data. This can mean that the view of risk overall can differ across the globe.

• Cost of complying with the requirements: Complying with the reporting requirements, which can be relatively complex and detailed, may also be costly. This is particularly true for those institutions that operate in multiple jurisdictions with different rules.

• Managing large volumes of data: Simply put, trade repositories collect a lot of data, and the volume can prove overwhelming. To interpret the data effectively, advanced analytical tools and skilled workers can be required.

Altogether, the challenges that global trade repositories face prove the need for cooperation between regulators and authorities internationally, as well as advancements in technology, to really reap the benefits.

Global trade repositories offer an invaluable insight into financial transactions, and derivatives in particular, enhancing transparency for regulators looking to reduce risk.

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Frequently asked questions

Why are global trade repositories important?

Trade repositories more generally are important because they allow regulators to better enhance market transparency, assess risk and monitor activity due to the large volumes of data they collect and standardise. Global trade repositories, more specifically, have a broader scope, collecting data from multiple jurisdictions to offer a wider view of derivatives markets.

What types of trades are reported to global trade repositories?

Financial institutions and entities like banks, investment forms and hedge funds need to report their trades to trade repositories, and most over-the-counter derivatives – like forwards, options and swaps – are reported to trade repositories to increase transparency. Exchange-traded derivatives, like futures, are often reported to global trade repositories too, helping to provide a broader view for the derivatives market.

How do trade repositories help mitigate risk?

Trade repositories aggregate large volumes of data relating to transactions, giving regulators a valuable insight into the market to not only enhance transparency but also identify vulnerabilities, potential issues and concentrations of risk before things become more serious.

Can individuals access information from global trade repositories?

Natural persons are generally unable to access the data held by trade repositories. It’s both confidential and highly detailed and intended to be seen by regulators and other authorities. That said, aggregated and anonymised data is sometimes published by regulators to be viewed by the public. But the raw data itself, generally, is not available to individuals.

What’s the difference between a trade repository and a central clearing counterparty?

Both trade repositories and central clearing counterparties both rose in prominence following the 2008 financial crisis and help in increasing transparency and mitigating risk, particularly in the derivatives market. However, they play distinct roles.

Trade repositories collect and store data for regulators – they don’t take on any risk themselves – whereas central clearing counterparties actively mitigate risk through taking on counterparty credit risk and providing clearing and settlement services.

References:

https://www.esma.europa.eu/esmas-activities/markets-and-infrastructure/trade-repositories