Guest Author: Larry Thompson, managing director and general counsel of The Depository Trust & Clearing Corporation

I had the pleasure recently to speak at SunGard’s New York City Day and focused, in part, on a little known provision of Dodd-Frank, known as indemnification, which is gaining traction as a key issue in the broader debate for enhanced international regulatory harmonization. Swap data repositories (SDRs) are essential to bringing transparency to the market, and indemnification is intended to ensure the confidentiality and safety of data they hold and report—a laudable goal by any standards. But this provision may prove to be more complex – and potentially damaging – than envisioned.

The requirement says that U.S.-based SDRs need to obtain indemnification from foreign regulators prior to sharing critical market data with them. The fact is the overseas regulators we have met with have confirmed they are unlikely to enter into these agreements for two reasons:

1. The extraterritorial mandate is inconsistent with traditions and legal structures in Europe, and
2. Many global regulators are already following policies and procedures to safeguard and share data based on guidelines established by the OTC Derivatives Regulators Forum (ODRF).

We’ve been playing close attention to this situation because if the indemnification provision is not revised or eliminated, it has the potential to undermine the ability of regulators and market participants to obtain a comprehensive and unfragmented view of the global derivatives marketplace.

The indemnification requirement will threaten the ability of repositories to provide this aggregated view of the market. The clear risk is that it may encourage third party countries to create regional trade repositories, which could undermine global reform efforts by limiting the ability of regulators to quickly and efficiently review aggregated, comprehensive position data for counterparties and underlyings, especially during times of crisis.

Some members of Congress have already begun outreach to their European counterparts to seek a resolution. But the clock is ticking. The European Parliament is poised to adopt counter indemnity language in the final version of its own derivatives reform legislation, which would result in U.S. regulators, like the CFTC and SEC, facing diminished access to information held in overseas repositories – just like their overseas counterparts in the U.S.

Chairman Gensler recently testified before the House Financial Services Committee that the CFTC and SEC agree that indemnification is problematic and suggested two potential exemptions to the enforcement of the provision. The first exemption would apply to situations in which a foreign regulator (third party) requests data from a repository that has dual-registration with regulators in the United States and overseas. The second would apply when a foreign regulator (third party) seeks to obtain information that is held by the CFTC or SEC.

This issue is clearly on the radars of the U.S. agencies, but we believe that more needs to be done. The legal language in Dodd-Frank leaves little room for the regulators to work without Congressional intervention – and the exemptions, while well intentioned, do not solve the problem.

At DTCC, we’ll continue to work closely with lawmakers and regulators in the U.S. and Europe to address this matter because one thing is certain – if no action is taken, transparency for global regulators will be reduced, creating precisely the type of opacity that Dodd-Frank and EMIR have sought to eliminate.

Larry Thompson is managing director and general counsel of The Depository Trust & Clearing Corporation (DTCC), a non-commercial market utility that serves as the primary post-trade infrastructure organization for the U.S. capital markets.