ISDA: Regulators must move to real-time risk identification to leverage today’s reporting rules

Rick Steves

While there’s room for improvement in the reporting framework, the current data is far from useless, ISDA stated. It contains crucial information that can help regulators spot warning signs, provided there’s investment in data cleaning and analytics.

Over a decade since rules were established requiring the reporting of all derivatives to trade repositories, regulators are revisiting the issue of market transparency.

Triggered by recent unexpected bouts of market turbulence, questions are being raised about the efficacy of existing reporting mechanisms in providing early warnings of market risks.

Transition from retrospective to real-time risk identification

A recent paper by the International Swaps and Derivatives Association (ISDA) highlights that while a significant amount of data exists in repositories, the key challenge lies in data analysis. The paper notes that data on counterparty identity, notional amounts, valuations, and risk metrics is available, but needs to be cleaned, standardized, and analyzed to serve its intended purpose.

The European Securities and Markets Authority was able to identify the increased exposure at the collapsed hedge fund Archegos based on data reported to EU trade repositories. The issue, however, is the ability to spot such exposures in real-time, rather than post-facto.

For regulators to transition from retrospective to real-time risk identification, significant investment is required in data analytics and systems. This includes the development of management dashboards that can signal changes in positions and exposures immediately.

Some regulators can’t access data reported outside their authority

Another challenge is jurisdictional limitations, as some regulators can’t access data reported outside their authority. One proposed solution is the signing of Memorandums of Understanding (MOUs) between regulators to facilitate data sharing, although this approach may raise legal and privacy concerns.

Global initiatives are underway to improve the consistency and accuracy of reported data. For instance, ISDA’s Digital Regulatory Reporting initiative aims to create a common interpretation of each rule set, which can be executed by machines, thereby making the data more reliable.

While there’s room for improvement in the reporting framework, the current data is far from useless. It contains crucial information that can help regulators spot warning signs, provided there’s investment in data cleaning and analytics. However, simply accumulating more data without the tools to analyze it will not resolve the issue.

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