Issues in Market Transparency for Credit Derivatives: Price, Volume, and Exposure Information

Supervisory efforts for addressing infrastructure risks in the OTC derivatives markets have traditionally
been focused on solving collective action and coordination problems among market participants. Some
of these problems have included fostering improvements in operational infrastructure, encouraging
take-up of centralized platforms, and driving market-wide standardization and transparency in
documentation, technology, and business processes. With the significant market turmoil of 2008,
culminating in the failures and near-failures of major market participants, supervisors brought market
transparency to the fore as one of the most critical policy objectives for addressing the systemic risks of
the OTC derivatives markets in general, and credit derivatives markets in particular. While financial
supervisors have promoted transparency in the OTC derivatives markets through ongoing efforts, the
heightened focus on increasing the availability of market information to regulators and to the public is a
welcome development. OTC derivatives market participants and service providers should acknowledge
market transparency to be a top policy priority and work with supervisors to make market information
available to both regulators and the public in a timely, comprehensive, and meaningful fashion.
Although “market transparency” has been declared a major policy objective (e.g. in a number of
statements published by the U.S. Department of the Treasury), the term is subject to wide
interpretation and can take multiple forms. Therefore it is appropriate, and in fact necessary, for
policymakers and regulators to clearly define their terms, so that policy positions and regulatory
activities are firmly grounded in explicit and reasonable objectives. Among the items to be considered
are users, quality, and types of market information, as well as the means by which market information is
made available to users.
The area of focus for today’s discussion is the availability and quality of various types of information in
the credit derivatives markets. Supervisors generally agree that the amount and quality of credit
derivatives market information presently available to regulators and the public is insufficient to address
public policy concerns. Although a number of global efforts are underway to improve transparency for
credit derivatives and credit risk transfer in general, there is considerable work to do. Among the
current sources of information include providers of macro-level statistics such as the BIS and ISDA;
centralized infrastructure platforms that can provide position information such as the DTCC Trade
Information Warehouse and CDS clearinghouses; vendors of consensus pricing information for more
liquid CDS instruments; and various providers of information on credit event management and
settlement. To date there is no provider of discrete, near-real-time transaction information, such as is
provided by the FINRA TRACE system for U.S. corporate bond markets.
The public and private sectors are involved in a number of efforts to address gaps in all of these areas.
Some challenges include expanding the coverage of position and exposure information to all credit
derivative transaction types, including the more bespoke segment of the market; improving the quality
of presently available information, including more accurate data representation for counterparties and
underliers; the suitability of CDS markets for transaction-level reporting; and ongoing global
coordination among financial authorities.