DTCC and Swift eye FX trade repository

The chance the New York-based Depository Trust & Clearing Corporation (DTCC) will be selected to operate a foreign exchange trade repository appeared to increase last week after it emerged DTCC would develop the commodity derivatives trade repository, granting it a near-monopoly of the nascent business of trade repositories for over-the-counter derivatives.

DTCC's Deriv/Serv unit has operated the trade information warehouse to hold a central record of trades in the credit derivatives market since November 2006. In the wake of the financial crisis, legislators in Europe and the US have demanded that reporting to a trade repository be extended to all OTC asset classes, including FX.

Through selection processes facilitated by the International Swaps and Derivatives Association in each asset class since the financial crisis, DTCC has now been selected to operate, either by itself or in partnership with another entity, the trade repository for equity derivatives and interest rate derivatives. On June 14, Isda announced DTCC Deriv/Serv had also been selected to develop the commodity derivatives repository, in partnership with German energy trading software company EFETnet.

Foreign exchange is the last remaining asset class for which a trade repository has to be selected. The global FX division of the Association for Financial Markets in Europe (Afme) has been carrying out the selection process and ended a public request for proposal (RFP) on May 6. It is understood six entities have entered the RFP, and DTCC last week confirmed it had submitted a proposal in partnership with Brussels-based networking specialist Swift.

"DTCC and Swift have jointly responded to an RFP from Afme to build a trade repository for FX. We understand Afme is running a process reviewing potential providers, so it wouldn't be appropriate to elaborate at this time. In general, we believe we have a design that can support multiple asset classes," said a spokesperson for DTCC.

Having reviewed the proposals, Afme began formal vendor presentations late last week as it moves forward with the process. James Kemp, managing director of Afme's global FX division in London, declined to comment specifically on the DTCC/Swift alliance but said observers should be aware of the differences between FX and other asset classes – a factor that will certainly weigh on the choice of repository provider.

"Let us absolutely not prejudge who will be the best entity to run the FX repository. The FX industry is slightly different in that it is global – much more so than other asset classes. The number of participants and the number of tickets is also much higher than other asset classes, so the sheer amount of data a repository will need to handle is of a greater magnitude as well," said Kemp.

Some market participants share Kemp's concern about the size of the FX market, but others suggest DTCC's experience in operating a repository in other asset classes make it a natural choice for FX.

"My sense is that DTCC is well geared-up and it obviously has a head start – it would be strange if, just because of volume issues, it didn't move into this space. For any entity not already operating as a repository, this will be a big challenge," said one London-based lawyer close to the discussions.

Last month it emerged central settlement provider CLS Bank had decided not to pitch to operate the repository, having suggested publicly last November that it would do so. "The size, scope and scale of building a trade repository are beyond our core business and expertise," CLS told Afme earlier this year.

In selecting the most appropriate provider of a repository, Afme's global FX division has identified a number of criteria the provider should meet, which include the functionality and underlying technology capabilities for storing data and reporting it to regulators, data resilience, disaster recovery, governance structure and business model.

Time to market is also likely to be an important factor. Afme has not yet indicated when it plans to finalise the selection, but the repository will need to be up and running in time to meet an end-of-2012 deadline set by the Group of 20 leading economies for reporting and clearing rules to come into force.