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Central Trade Repository Would Allow Market-Wide Monitoring of Systemic Risk

Proposal Would Help Stabilize Financial System and Bring Transparency to OTC Derivative Trading

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WASHINGTON, DC - U.S. Senator Charles E. Schumer announced Tuesday that he is drafting legislation requiring the consolidated reporting of overthecounter derivative trades to a central trade repository.  The central trade repository would collect trade information from all OTC derivative trades, including cleared and uncleared trades, in order to allow regulators to monitor the effect of such trades on systemic risk.


"The market for OTC derivatives can significantly impact the overall health of our financial system, yet trade information is not available to investors and regulators," said Schumer.  "We need to make sure that OTC derivatives never again contribute to an economic crisis. Creating one central warehouse to collect information about all derivative trades would allow us to monitor the effect of these markets on systemic risk. President Obama has called for regulating this sector by moving standardized derivatives to clearinghouses. Consolidating the information gathered by these clearinghouses will bring crucial transparency to the OTC derivatives market."


A lack of transparency in the OTC derivatives market contributed to the instability in the banking system that precipitated the current recession, because financial institutions had no way of knowing each others' exposures as a result of such transactions - for example, if their counterparty had large exposures to AIG or Lehman Brothers. As a result, banks became reluctant to lend to each other, contributing to the global freeze in the credit markets last fall.


In May 2009, the Obama Administration proposed regulating the OTC derivatives market by requiring that all standardized derivatives be traded via central clearinghouses, which will allow for netting of exposures and require parties to back their trades by posting adequate collateral.  However, there are multiple clearinghouses, and more are springing up in the wake of the Administration's proposal.  As a result, marketwide information regarding the various OTC derivatives markets would remain fragmented and incomplete, depriving regulators of crucial information required to monitor systemic risk.


The central trade repository proposed by Senator Schumer would collect the information gathered by these clearinghouses, as well as trade information for uncleared OTC derivatives transactions, providing regulators a valuable tool for monitoring systemic risk.  In addition, aggregate trade information will be made publicly available on a periodic basis so that there is greater clarity for all market participants.


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