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Whether planned, accidental or alphabetical based on last names, it was probably fortunate that the FIA Boca panel on clearing placed Michael Bodson, CEO of the DTCC at the opposite end of the stage from Kim Taylor, president of CME Clearing. Their views do tend to diverge.
In November, after the CME sued it, the CFTC reversed its position that only the DTCC could operate a Swaps Data Repository (SDR) and gave the CME permission to run its own.
DTCC was not happy and has threatened to file its own lawsuit against the CFTC, since that has become a popular and apparently effective approach to the U.S. regulator.
“Dodd Frank was focused on strengthening the financial markets with public transparency and greater systemic risk control by the regulators,” said Bodson. “We are disappointed at the CFTC interpretation. We understand why they [CME] want their own, but it runs contrary to the public good. Having a single SDR allows regulators to see what is happening in the marketplace globally lets them see where risk is building up.”
DTCC’s interest in a single SDR stopped short of offering to yield its business to CME in the interests of data finality.
CME will send its cleared trades to its own repository, and it will send a copy to another repository, such as the DTCC, if a client requests.
Bodson said the CME plan takes away participant choice to direct their information to the SDR of their choice.
“It runs completely contrary to Dodd Frank.”
As an industry owned utility and an accepted standard in equities settlement, DTCC tends to get annoyed, even petulant, when its effort to expand the franchise is resisted.
“You have to regain public trust and people need to think regulators can regulate the industry,” added Bodson. Fragmented repositories run completely against that policy, he said, adding that the DTCC’s interpretation of the rule are the same as what the CFTC had posted on its Web site for a year.
CME’s Kim Taylor agreed that transparency is important but doesn’t see that having more than one SDR harms transparency.
“Choice is not best served by having only one SDR that everyone is forced to choose. We took a long term view on overall efficiency of the industry. As transactions become more and more cleared, having a clearing house hold the inventory of positions is almost a defacto SDR function. Over time, as more transactions become cleared it will become more cost effective for the marketplace to get both of those requirements met with a single process.”
The CFTC already amalgamates data from multiple sources and it can do the same from two SDRs.
“The thing that is really important in that process is to make sure that when there is more than one SDR, care is taken to avoid duplicate or triplicate records.”
Christopher Edmonds, president of ICE Clear Credit, said the ICE subsidiary was one of the first to get a trade depository designation, and he agreed with Taylor.
“We have stayed out of this debate; now the decision is made we will go with that interpretation,” he said.
He echoed ICE CEO Jeffrey Sprecher who has said that rather than fight with regulators, ICE will wait for the rules and then figure out how to operate within them.
“The biggest thing from a risk perspective is that the SDR is not relevant,” Edmonds added. “We are managing the positions in the clearing house.”
Michael Davie, CEO of SwapClear, LCH.Clearnet, added that the information generated by an SDR is useful only if it is complete and accurate.
Jerome Kemp, managing director at Citigroup Global Markets, noted that before the crisis, anyone running an exchange wanted a vertical silo to a clearing house.
“Now the horizontal model has become a key driver,” he said, turning to M. Ramaswami, President of SGX, for his views of operations in Asia.
Singapore has historically operated vertically with trading and clearing and depository, Ramaswami said.
“We have a history of being a vertical, and along with this we have a history of trading contracts from other exchanges. We support trading an instrument in multiple locations and then clearing with CME or SGX. We see ourselves as a clearing house that can take trades from OTC or SEF or any kind of a trade agreement. In the long run, clearing houses have to find ways to connect pools of liquidity. You cannot be closed to taking transactions from anyplace else.
LCH has operated for 100 years as a horizontal CCP, is seeing something similar as exchanges decide they don’t necessarily want to be in the clearing business, Davie said.
“We have picked up contracts in listed derivatives, equities and more traditional cleared products. As it is becoming more expensive to operate CCPs, there are exchanges who see advantages in clearing through LCH. We are increasing membership and shareholders. We have a great relationship with NASDAQ and we are talking to other execution venues.”
He finds the OTC space particularly interesting. LCH.Clearnet is applying for a license in Australia, he added. Market participants are looking for critical mass not just because of cost but also liquidity.
“Can I get in and out of my trade seamlessly and have clearing happen efficiently and cost effectively?”
ICE’s Edmonds said that with the bifurcation between futures and swaps, the horizontal model is needed for efficiency.
“As someone remarked to me recently, money isn’t growing on trees these days.” It would help, he added, if the SEC and CFTC could get on the same page with their rules and interpretations.”
The market will decide whether they want vertical or horizontal, he added.
Taylor said the debate is old.
“At CME we are sometimes vertical and sometimes horizontal. Even the grand daddy of the horizontal, LCH, has exchange ownership coming its way. I think the key question is that maybe we are ending up in a place where the business model for clearing houses is actually both. If you want clearing services from CME, press pound or hash.”
