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Global coordination of capital market regulations and data requirements - Resilience of the EU financial sector in the global context

Reaching for the moon but keeping both feet on the ground

By Berg Jesper - Director General, Finanstilsynet - Financial Supervision Authority, Denmark


A lot of resources are currently being invested at the European and national level in improving our market and transaction data. The aim of improving financial stability through better monitoring and understanding of market related risks is very laudable. However, we should not underestimate the challenges of building a thorough understanding of a complex set of interlinked markets through a mapping of individual transactions. Keeping this in mind there is a clear need for parallel work to improve our understanding of market risks through simpler and more focused channels. And perhaps to rethink the size of our steps next time we think big.

Experience from the financial crisis shows the importance of maintaining a solid understanding of the way derivatives shift risk between financial agents. As in other areas of risk assessment the prerequisite is good and reliable data.

New reporting requirements for derivatives were introduced in 2012 in the European Market Infrastructure Regulation (EMIR) and its underlying technical standards. These inter alia specify a total of up to 140 different data points to be reported for every transaction. Approached from the molecular level of individual transactions this is probably necessary given the inherent complexity of instruments etc. But aggregating these individual data to a meaningful data set constitutes a huge challenge.

Like many other supervisory authorities, we at the Danish FSA have had some initial experience with the data in relation to an analysis of the use of derivatives in our largest banks. Sadly, the EMIR data proved impossible to use and we had to ask the relevant banks to report entirely new data for the purpose of this specific analysis.

The reason for this is twofold. First of all, the EMIR never framed the format for data received by the Trade Repositories. The use of several different formats prevents regulators from combining data in an effective manner. Second, the quality of the data from the Trade Repositories is still poor. If a position has been reported by two different counterparties, it is often not possible to match the two reporting’s. This decreases the reliability of the data.

Of course we are still early in the process of aggregating and working with the new data and some of our problems might be related to this. Several actions have been taken in particular by the European Securities and Markets Authority (ESMA) to improve compatibility and quality of data. But still we think this experience has shown us not to set our expectations too high with regard to the analysis that can be performed based on the new transaction data. Even when we look ahead and take expected quality improvements into account. Accordingly, we will need to improve our understanding of key risks through more focused work where we ask banks to report aggregated data tailored to the task at hand.

Furthermore, we think there is a more general learning from this experience. That is to consider a more gradual approach next time we reach for the moon.