The FSB's Swaps Data Aggregation Report, a Technical Review
In case you haven’t noticed, the most aspirational technology project of the last half century has hit a road block. It’s caught up in an avalanche of data but with no means of aggregating the data.
The Financial Stability Board’s report “Requirements for Swaps Data Aggregation in Trade Repositories” (the “Report”), released on Sept 19, was intended to settle the question of how to obtain a complete view of swaps transactions entered into between counterparties anywhere in the world. It was to be preceded by the implementation of a global identification scheme for financial market participants and the products they trade in. This was to be the first step on a longer journey to aggregate financial transaction data from all financial market participants in all financial assets so that regulators can observe the contagion of systemic risk building up across the financial system, the issue brought to prominence by the Lehman failure.
Swaps trades are now captured in multiple, geographically dispersed trade repositories (TRs) and cannot be aggregated. This is due to the premature launch of the swaps regulatory regime in the US, the subsequent lack of a global standard for the data comprising reportable swaps transactions, and the absence of a mechanism to identify the business owner of a multiple set of counterparties comprising a single business entity.
The Report discusses legal, technological, and regulatory issues to be resolved. For the interests of WS&T readers we will concentrate on the technology issues, which can be summarized as follows:
- Finalizing the global identification scheme -- the LEI, UPI, and UTI as the precursor to data aggregation
- Deciding on one of the two methods of aggregating data from multiple trade repositories recommended in the Report
- Reflecting on the role and entities to be designated as the FSB’s newly introduced intermediary -- the trusted third party (TTP)
The precursor to data aggregation: the LEI, UPI, and UTI
The Report emphatically states that:
…it is critical for any aggregation option that the work on standardization and harmonization of important data elements be completed, including in particular through the global introduction of the Legal Entity Identifier (LEI), and the creation of a Unique Transaction Identifier (UTI) and Unique Product Identifier (UPI).
The work of using and improving the LEI and building the Global LEI System (GLEIS) is ongoing and has been reported on in another post by this author. For a more detailed discussion of the status of the LEI see WS&T’s article by this author at LOU + COU = GLEIS.
For reporting swaps transactions to TRs each counterparty is required to obtain a unique identification code, an LEI (Legal Entity Identifier) to be used in each reported swaps transaction. Further, in the EU a Unique Transaction Identifier (UTI) structured with the LEI, as its prefix is also to be included so two halves of a transaction between two counterparties can be matched up even though they are sent to different TRs.
In the US, while an LEI is required in a swaps transaction, the prefix of the UTI is not permitted to be an LEI. Rather it is to contain a CFTC issued or sponsored "name space" identifier. Futures commission merchants (FCMs), swaps dealers, and major swaps participants must register with the National Futures Association and obtain this code. They must also receive an LEI. Neither of these unique codes has any mechanism to allow multiple legal entities to be aggregated up to their controlling parent entity, a desired and required capability for data aggregation and risk analysis.
To quote from the Report:
The LEI with hierarchy (for consolidation purpose) is also needed for some mandates at least in a second step when the fully fledged LEI is in place.
Rather than suggesting making the control entity part of the LEI code itself, which it is not now and which would be an acknowledgment of an improper start for the LEI code construction, the Report suggests a workaround, adding the “final beneficiary” as a new data element.
Not including the control entity within the LEI, however, will forever leave regulators and financial institutions with secondary data mapping requirements. It will also open up multiple risk exposure determinations from aggregating transaction values and cashflows differently. Each submitting counterparty for each transaction may include its own sourced and possibly different "final beneficiary" with each unique LEI.
The Report further states:
The work to establish uniform global identifiers, i.e. agreement on a UTI and UPI as well as adoption of the LEI, should be accelerated to ensure that OTC derivatives data can be adequately aggregated. These steps are important under any option for an aggregation mechanism, and indeed more generally to improve the usability of TR data. The work will probably require official sector impetus and coordination as well as partnership with the industry to achieve global acceptance and serve public interest goals.
It should be noted that the original consultative papers on a global identification scheme first issued in 2010 by the SEC, CFTC, and the newly established OFR (Office of Financial Research) set out these same goals nearly five years ago. The SEC on Nov. 17, 2010, mirroring the other three agencies, wrote:
Without such unique identifiers, and the ability to aggregate data across multiple markets, entities, and transactions that they would provide, the enhanced monitoring of systemic risk and greater market transparency that are fundamental goals of Dodd- Frank cannot be fully achieved. Such identifiers would also have great benefits for financial transaction processing, internal recordkeeping, compliance, due diligence, and risk management by financial entities.
The CFTC on Dec. 10, 2010, wrote:
A common set of reference identifiers for participants and products could yield significant efficiencies in both the public and private sectors. Information about financial firms operating in different functional areas and different jurisdictions could more readily be identified by regulators. In addition, financial firms could eliminate the use of multiple proprietary reference systems and move to a single, widely accepted system.
With the FSB having taking on the responsibility to define the first of these identifiers, the LEI, the FSB wrote similarly on June 8, 2012:
There is widespread agreement among the public authorities and financial industry participants on the merits of establishing a uniform global system for legal entity identification.
It would reduce operational risks within firms by mitigating the need for tailored systems to reconcile the identification of entities and to support aggregation of risk positions and financial data, which impose substantial deadweight costs across the economy. It would also facilitate straight through processing.
The benefit to regulators and the industry of this global identification scheme has yet to materialize. The regulatory benefit is the subject of continuing review, the Report being one of a number of such regulatory reviews still underway -- realizing the industry’s benefit has no comparable activity underway to turn this “bar code for banking” aspiration into reality. [Continue reading on next page]
Allan is President and founder of financial industry joint venture development company Financial InterGroup Holdings Ltd; and strategy & acquisition consultancy Financial InterGroup Advisors. The companies are engaged in the capital, contract, currency, cash and investment ... View Full Bio
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