Friday, May 29, 2009

DTCC seeks US oversight of ‘trade warehouse’

Posted in the Financial Times by Jeremy Grant:

The Depository Trust & Clearing Corporation, the US clearing and settlement system, on Thursday said it had applied to bring its “trade warehouse”, which stores information on credit derivatives trades, under the oversight of US federal regulators for the first time.

The move is another sign of how the post-trade businesses that underpin much securities and derivatives trading are responding to demands by US authorities to increase transparency and accountability in the wake of the financial crisis.

This week LCH.Clearnet, Europe’s largest clearing house, said it would extend its over-the-counter derivatives clearing services to asset managers, pension funds and hedge funds. It was seen as one of the earliest responses to demands from the Obama administration to ensure that more OTC derivatives were processed through clearing houses, which ensure that trades are completed if one party to a trade defaults.

The DTCC’s trade warehouse acts as a central repository, or registry, for trades that are negotiated in the OTC, or privately negotiated, derivatives markets.

As part of a sweeping plan for tighter supervision of such markets Tim Geithner, US Treasury secretary, two weeks ago said the Obama administration would ask Congress to amend legislation to require that OTC trades be “reported to a regulated trade repository”.

Such trade repositories should “make data on individual counterparty’s trades and positions available to federal regulators”.

The DTCC’s trade warehouse is not regulated.

Peter Axilrod, head of the derivatives processing business at DTCC, said the post-trade group had decided to apply for the warehouse to become a “limited purpose trust company” that would be regulated by the US Federal Reserve and New York state banking department.

He said it would be easier for regulators to work on global regulatory collaboration on transparency and post-trade issues if the infrastructures involved in storing information on derivatives trades were regulated.

“All of the signs we are getting from regulators are that the warehouse is such an important part of the infrastructure for CDS that it should be regulated. So we thought we should take the initiative,” Mr Axilrod told the Financial Times.

The idea was to avoid a “long process that might involve legislative changes [in Congress]”.

Mr Axilrod said: “It [the warehouse] will now be a key part of the credit derivatives infrastructure globally and becomes concrete enough for regulators to include in their discussions about what a collaborative framework might look like for the credit derivatives market.”

The new trust company would also establish a subsidiary in Europe to “facilitate the offering of regulated warehouse services in Europe”. The European Commission has said it wants to see the establishment of a trade warehouse for CDS, similar to the one in the US.

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