The House Financial Services Committee has approved by voice vote the bipartisan Swap Data Repository and Clearinghouse Indemnification Correction Act, HR 4235, which was introduced by Rep. Robert Dold (R-IL) and Rep. Gwen Moore (D-WI), to ensure that U.S. and foreign regulators can share necessary swaps data to increase market transparency and facilitate global regulatory cooperation.
The Dodd-Frank Act requires swap data repositories and clearing organizations to make data available to foreign regulators. But this data-sharing can happen only if foreign regulators agree to indemnify the U.S. entity and U.S. regulators for any corresponding litigation expenses that might arise. Foreign regulators have been unwilling or unable to agree to such indemnification agreements under their own legal structures, noted Rep. Dold, so the indemnification provisions would prevent the necessary data-sharing. To ensure that U.S. and foreign regulators have access to derivatives data, H.R. 4235 would eliminate the indemnification provisions that would otherwise impede the necessary data-sharing arrangements.
Dodd-Frank policy is to create a global OTC derivatives information repository so that U.S. and foreign financial regulators can have a centralized, transparent, and comprehensive information database with current worldwide swaps-transaction data to support systemic risk management, oversight, and regulation. Without H.R. 4235, said Rep. Dold, the indemnification provisions would undermine and effectively invalidate that critical Dodd-Frank policy by creating several local repositories with only partial and fragmented information instead of the necessary comprehensive global information database.
Section 763(i) of the Dodd-Frank Act added a new provision to the Securities Exchange Act requiring that any U.S. or foreign authority, other than the SEC, seeking to obtain security-based swap data from a SEC-registered security-based swap data repository agree to provide indemnification to the security-based swap data repository and the SEC for any expenses arising from litigation relating to the information provided. This indemnification requirement is a precondition to obtaining data maintained by the security-based swap data repository.
The SEC recommended that Congress consider removing the indemnification requirement added by the Dodd-Frank Act. The indemnification requirement interferes with access to essential information, said Ethiopis Tafara, Director of the SEC Office of International Affairs, including information about the cross-border OTC derivatives markets. In removing the indemnification requirement, Congress would assist the SEC, as well as other U.S. regulators, in securing the access it needs to data held in global trade repositories. Removing the indemnification requirement would address a significant issue of contention with the SEC’s foreign counterparts, while leaving intact confidentiality protections for the information provided. (Testimony of March 21, 2012 before the House Capital Markets Subcommittee)
According to the SEC, the indemnification requirement presents a barrier to U.S. and foreign governmental entities’ ability to obtain data from a security-based swap data repository, in particular because U.S. and most other foreign governmental entities lack the legal authority to enter into the necessary indemnification agreement required by Section 763(i).
Given the limitation that the indemnification requirement would place on regulators’ access to data held by a SEC-registered security-based swap data repository, foreign regulators, through formal and informal contact, have voiced strong concerns about the requirement to SEC Commissioners and staff, and have urged the SEC to find a way to exempt them from the indemnification requirement.
In both bilateral and multilateral discussions with SEC staff, regulators of the major OTC derivatives markets have expressed concern that they would not be able to comply with the indemnification requirement, and that the indemnification requirement presents an obstacle to their ability to access data about OTC derivatives transactions necessary for the exercise of the duties of the regulator. The European Securities and Markets Authority (ESMA) submitted a comment letter to the SEC expressing its view that the indemnification requirement undermines the key principle of trust underlying the exchange of information between the SEC and European Union regulators. (letter of Jan 17, 2011)
The SEC is concerned that there is a potential danger to the US regulatory framework if foreign regulators are unable to access data held by SEC-registered security-based swap data repositories. U.S. and foreign regulators share a common need to have access to data about OTC derivatives transactions, especially those transactions that take place across borders. In order to protect their access to security-based swap data, some foreign regulators have indicated to SEC staff that they plan to respond to the U.S. indemnification requirement by setting up, or encouraging the establishment of, local trade repositories, which would not be registered with the SEC and, therefore, would not be subject to the indemnification requirement. In addition, U.S.-based global trade repositories may seek to shift the bulk of their business to foreign jurisdictions to avoid the indemnification requirement, maintaining only a minimal presence in the United States necessary to service the U.S. market.
In the SEC’s view, the establishment of separate local trade repositories in the United States and in foreign jurisdictions would be likely to produce inefficiency and fragmentation. Inefficiency may result from having multiple trade repositories collect overlapping data. Under these circumstances, regulators would have to interact with many different trade repositories to obtain an accurate picture of the relevant OTC derivatives market. In addition, market participants may find themselves having to provide the same transaction data to multiple trade repositories.
The SEC is seriously troubled by the statements of some foreign regulators about their intention to adopt reciprocal indemnification requirements, such that U.S. regulators would have to provide written indemnification agreements to foreign trade repositories as a precondition for accessing data, or otherwise block access by U.S. regulators to foreign trade repositories. The SEC would be legally unable to meet any such indemnification requirement and has argued vigorously against similar requirements in other contexts.