Subir Gokarn: Launch of the OTC derivatives trade repository
Inaugural address by Dr Subir Gokarn, Deputy Governor of the Reserve Bank of India, at the
CCIL, Mumbai, 9 July 2012.
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We are gathered here to mark the launch of the OTC Derivatives Trade Repository. As you
know, in the aftermath of the US sub-prime crisis, improving transparency and reducing
counterparty risk in OTC derivatives transactions have been two principal themes of
discourse in the context of helping create a robust financial market architecture. This would
not only reduce the possibility of recurrence of such a crisis in future but also contain the
fallout and facilitate timely action by regulators. Transparency of OTC derivatives markets is
now viewed as an essential pre-condition for all other measures to be effective. Regulators
need comprehensive and timely information in order to effectively regulate, prevent risk
build-up and ensure pre-emptive corrective action. Similarly, market participants also need to
have sufficient knowledge about overall activities and positions in the market to enable them
to better assess the potential riskiness of their operations. They can then take appropriate
risk management measures contributing to the overall safety of the financial system.
The 2009 commitment of G-20 at Pittsburgh is based on this premise and accordingly states,
"All standardized OTC derivative contracts should be traded on exchanges or
electronic trading platforms, where appropriate, and cleared through central
counterparties by end-2012 at the latest. OTC derivative contracts should be
reported to trade repositories."
Though Indian financial markets are relatively sparse in terms of the number and complexity
of products as well as varieties of participants, the Reserve Bank has always been
concerned with improving the transparency of the OTC derivatives market. The Bank had put
in place summary reporting in various forms according to the regulatory need in case of all
OTC derivatives, particularly forex derivatives, much before the onset of the crisis. The Bank
had even required mandated transaction level reporting much before the importance of
transparency for financial safety was widely accepted. It may be recalled that in July 2007,
RBI had, through a regulatory mandate, tasked CCIL to collect and collate transaction level
data for IRS. The reporting framework for Credit Default Swaps (CDS) was put in place from
the date of introduction of the instrument itself. The current initiative is another significant
step in that direction. Its objective is to create a comprehensive repository framework for all
OTC foreign exchange and interest rate derivatives with phase-wise implementation of the
various reporting modules.
The reporting platform being launched today caters to OTC inter-bank USD-INR forwards,
FX swaps and FCY-INR options. The platform will be upgraded in subsequent phases to
capture other inter-bank foreign exchange derivatives namely FCY-INR and
FCY-FCY forwards and FX swaps; FCY-FCY options; FCY-INR and FCY-FCY currency
swaps; FCY Interest Rate Swap (IRS), Forward Rate Agreement (FRA) and
Caps/Floors/Collars; and all/selective client trades in the above foreign exchange derivatives
and Rupee IRS. Over the period, it will be integrated with the reporting platform for the Credit
Default Swap (CDS).
In its final shape, this repository structure will not only become a warehouse of information on
OTC derivatives markets but will also provide post trade processing services for the
derivatives contracts, thus enhancing the market efficiency. CCIL has been advised to
develop various post-trade processing services in consultation with market participants. The
repository structure will also be used for dissemination of price and volume data to market
participants as well as to the general public.
Globally, the concept of Trade Repository is evolving. One of the issues being debated is
data portability and aggregability among the trade repositories spanning countries and
jurisdictions. The OTC derivatives market in India mainly comprises domestic counterparties
and hence, extra-jurisdictional issues do not have much significance at this point in time.
However, we are alive to the needs of uniformity of standards across the globe and our
repository framework should have sufficient flexibility to conform to international standards
and best practices as they evolve depending upon their relevance in the Indian context. This
is a task for CCIL.
It is well recognised that there are significant economies of scope between central
counterparty functions and repository functions. Yet, the two have some fundamental
differences inasmuch as one involves taking risky positions while the other is a pure service
function without any exposure. The RBI working group on the subject has accordingly
recommended a subsidiary model for the repository function of CCIL, to preserve an arm's
length between CCP function and repository function of CCIL. This is in line with best
corporate governance practices. I am sure this aspect will be dealt with by CCIL as the
reporting system consolidates.
To conclude, I am pleased to observe that we are among the first few jurisdictions to have
fulfilled the G-20 commitment regarding reporting of OTC derivatives. I appreciate the hard
work that has gone into it by the teams from CCIL and Financial Markets Department of RBI
as well as the FIMMDA, FEDAI, PDAI and market participants. Thank you all for having
achieved another milestone in making the Indian financial system, transparent, safe and
robust.