Securities Exchanges

Securities exchanges are organized markets where broker‐dealers meet to trade securities among themselves. They are organized in the sense that there are specific sets of rules and regulations that all trading members must follow. They are also closely controlled and regulated by the local financial authorities, for example, by the Securities and Exchange Commission (SEC) in the United States in order to guarantee fair and equal treatment of all market participants.

Some of the more historically well‐known exchanges include the New York Stock Exchange (NYSE), NASDAQ, London Stock Exchange (LSE), and Deutsche Boerse. In recent years, exchanges in Asia, most particularly in China, have grown rapidly relative to their developed market peers and now rival the largest American and European stock exchanges in terms of the number and value of shares traded. Figure 7.4 highlights the ten largest stock exchanges that report to the World Federation of Exchanges (WFE) by value of electronic order book (EOB) shares traded and by market capitalization, a measure of the total market value of all shares listed on the exchange.

Exchanges have stringent admission criteria. These criteria apply to both trading members and companies whose shares are listed on the exchange. Before a security can be traded on an exchange, it must be admitted for trading via the exchange's formal listing process. To have its shares listed, a company must be large enough for there to be a market in its shares and it must agree to abide by the listing rules of the particular exchange. Listing rules typically include disclosure requirements, such as those aimed at keeping the market informed of its activities and the public reporting of profits and other financial information periodically. Additionally, securities traded on exchange need to have a minimum level of standardization and acceptable liquidity, which is typically measured by the amount of trading conducted in a particular issue over a fixed period of time.

Those securities not admitted for trading on exchanges are instead traded in OTC markets. In general, by historic precedent, most equity securities (e.g., stocks) are typically traded on exchange, and most debt securities (e.g., bonds) are traded in OTC markets. There are of course many exceptions to the rule. For example, stocks that are not liquid enough to be traded on‐exchange are also traded OTC, and bonds that are very liquid, such as government bonds, may be traded on‐exchange. The recent trend, however, has been for more and more securities to be traded on‐exchange, regardless of their liquidity.

Exchange Competition

In several developed markets, most notably the United States, Canada, and Europe, the traditional securities exchange model has been under attack by non–exchange trading venues, referred to as alternative trading venues. These venues, often electronic, offer very similar trade execution capabilities often with additional benefits for institutional traders.

In the United States in particular, the proliferation of non–exchange trading venues has led to increased competition and has led to an increasingly fragmented trade execution landscape. In some cases, some of these new entrants, such as BATS and DirectEdge, have since become registered exchanges and now are full competitors to the traditional exchanges. Figure 7.5 highlights the dramatic shift in trading volumes from 1998 to 2013. During this period, NYSE and NASDAQ, the two dominant securities exchanges, lost considerable market share to a combination of new exchange entrants and alternative trading systems (ATSs). While not necessarily harmful to the market, these trends have created competitive pressure on the traditional exchange model and created a more fragmented market structure in the United States.

Alternative Trading Venues

Alternative trading venues are non–exchange trading venues that compete with the traditional stock exchange model. Competition with the traditional exchange model used to be quite difficult when physical proximity to other traders was required to create an organized marketplace. However, with the advent of computing and telecommunications technologies that now allow trading to occur electronically outside the confines of a physical exchange, there has been a significant proliferation in non–exchange trading venues.

Regulators have been attempting to keep pace with this change and have repeatedly overhauled regulations to better account for the evolution of the market structure. Two of the most notable developments were the formal designation of alternative trading systems (ATSs) in the United States and multilateral trading facilities (MTFs) in Europe.

Alternative trading venues can either be “lit,” in which trading interest is publicly displayed, or “dark,” in which trading interest is either non‐public or non‐displayed. The industry refers to alternative trading venues that offer dark liquidity as dark pools. Dark pools can be broadly classified as exchange sponsored, broker‐dealer sponsored, or independent.

Inter‐Dealer Brokers (IDBs)

Inter‐dealer brokers (IDBs) act as brokers for brokers and facilitate transactions in cash security instruments such as bonds and stocks, as well as currencies and derivatives. With respect to securities, their role is typically to help match buyers and sellers of large blocks of securities that are generally unable to be traded on exchange.

In general, IDBs play an important role in the markets they operate, which are often less transparent than on‐exchange markets. A primary role of the IDB is to provide anonymity for the participating dealers. IDBs also facilitate the trading of highly illiquid and complex products.

There are few large IDBs in the market, the leading ones being ICAP, TullettPrebon, BGC, and Tradition. The fact that there are not many players in the IDB space helps make the process more efficient by concentrating liquidity: By contacting only one IDB a broker‐dealer automatically gets good exposure to all other broker‐dealers in the market.

With respect to cash securities, IDBs play a large role in the secondary trading of bonds. As illustrated in Figure 7.6, historically the role of the IDB was to facilitate anonymous trading between dealers in the inter‐dealer market, typically through voice communication channels. This market structure has evolved considerably with IDBs now offering voice and electronic channels as well as access to other trading participants beyond dealers, including hedge funds, market makers, and other non‐dealer liquidity providers.

Figure 7.6 also highlights another trend, which is the proliferation of single‐dealer platforms (SDPs) and multi‐dealer platforms (MDPs). In markets such as those for bonds, where the historic client channel was voice, SDPs and MDPs act as electronic trading platforms where clients can access quotes from one or multiple dealers, respectively. SDPs are typically owned by the broker‐dealer and provided to their clients. MDPs may be owned independently or by a consortium of broker‐dealers.

Clearinghouses

Clearinghouses capture and process trade details from counterparties, ultimately generating final payment and settlement instructions. The institutions will settle for items exchanged at a designated time based on the rules and procedures of the clearinghouse.

The key steps in a typical clearing process involve the following activities:

• Validation: Incoming trade details are validated with both the buyer and seller. The validation process will ensure that trade instructions are correct and that there are no errors or discrepancies.
• Matching: Buyer and seller instructions are matched. If there is a successful match, then this indicates that both the buyer and seller have agreed to the trade terms. Unmatched transactions will be investigated for the source of the discrepancy. It is worth noting that on‐exchange trades will be submitted to a clearinghouse already matched.
• Pre‐settlement risk management: In many cases, where the clearinghouse assumes risk management functions, the buyer's cash availability and seller's asset availability will be assessed to determine whether settlement can take place.
• Calculation of net obligations: The clearinghouse in most cases will calculate net security settlement and money payment amounts, aggregating individual transactions in a given security as well as payments into one net obligation per counterparty.
• Transmission of settlement instructions: On the settlement date, the clearinghouse will pass settlement instructions to the settlement system where settlement actually takes place. This will typically be at a central securities depository (CSD).

In the above model, it is worth noting that the clearinghouse does not take on any counterparty risk, which remains between the buyer and seller. In this model, the clearinghouse merely acts as a facilitator in creating matched and validated settlement instructions, in many cases netting obligations down to a net value.

CCPs

Central counterparties (CCPs) are a special type of clearinghouse where the clearinghouse acts as the buyer to every seller and the seller to every buyer. The legal process by which the CCP steps in between each transaction between buyer and seller is called novation. Once novation occurs, the CCP acts as a central counterparty between every buyer, and after this process is complete all buyers and sellers have counterparty risk only with the CCP, not with each other. Having a single counterparty has numerous advantages, including netting benefits, simplification of credit monitoring, and the reduction of systemic risk in the event of a single counterparty failure. However, this comes at the expense of having a single point of failure making robust risk management at these institutions particularly important.

The CCP takes on significant counterparty risk in this model. Theoretically, all obligations are equal and opposite, and the CCP's net exposure is zero. However, in practice, the CCP is subject to market and liquidity risks that must be carefully managed to avoid insolvency in a member default scenario.

CCPs manage their risk through a number of activities, which include:

• Initial and variation margin: Collecting margin, that is, securities or cash collateral, at the onset of the trade or periodically (i.e., typically daily) between trade date and settlement date to reflect changes in market value of the exposure
• Default fund: Collecting default fund resources that are sufficient to withstand a default scenario comprising the failure of one or more of the CCP's largest counterparties
• Client porting: Having pre‐established client porting provisions and mechanisms that facilitate the seamless transfer of customer positions from one clearing member to another in the event of a member default
• Collateral haircuts: Applying haircuts on collateral received for margin and default fund resources to cover market risks associated with any change in the underlying market value of the collateral

Beyond concentrating counterparty credit risk and reducing capital charges to its members, a CCP has the additional benefit of facilitating multilateral netting, as highlighted in Figure 7.7.

In the classic gross settlement model, all trades are settled individually and directly between market participants. This is both operationally inefficient as well as inefficient from a liquidity management perspective, as liquidity needs can swing wildly throughout the day as payments go in and out due to gross settlement. Importantly, CCPs enable multilateral netting, further reducing the number of payment obligations down to one per day, dramatically simplifying both settlement operations and liquidity management.

As with a clearinghouse, once net settlement obligations have been computed for a given counterparty, instructions will be submitted to the settlement system, again, typically a CSD for settlement. The next section discusses the securities settlement process in detail.

Settlement Models and Conventions

In practice, securities settlement now occurs as electronic book entry transfers and generally takes two forms depending on whether settlement occurs on a transaction‐by‐transaction basis or on an aggregate basis:

1. Gross settlement involves settlement of securities on a transaction‐by‐transaction basis. Gross settlement can take place either on a real‐time basis (referred to as real‐time gross settlement, or RTGS) in which case securities settle continuously throughout the day, or alternatively on a batch basis at a designated time. Batch settlement involves the deferral of set of transactions to a designated time during the day. As multi‐batch settlement slices become more frequent this second settlement approach begins to resemble RTGS.
2. Net settlement involves accumulating all buying and selling transactions into one net buy or sell transaction. At the end of the settlement day, in a net settlement system, each institution receives either one credit or one debit per security account reflecting the net of all buy and sell transactions executed during the day. Net settlement involves a delay until the end of the day, but this approach generates both operational and liquidity efficiencies for market participants.

As we have already described, securities settlement⁴ involves the simultaneous, final, and irrevocable receipt of securities against a corresponding delivery of payment. This concept, called delivery versus payment (DVP), is an important industry concept and its implementation in modern settlement systems results in significantly reduced settlement risk. Settlement risk arises when one counterparty delivers securities or value as per the trade agreement, but the other counterparty does not, potentially resulting in losses for the counterparty that has not received value or securities as expected.

Three broad types of DVP models exist as defined by the Bank of International Settlements (BIS),⁵ namely:

1. DVP Model 1 (gross simultaneous settlement): Systems that settle transfer instructions for both securities and funds on a trade‐by‐trade (i.e., gross) basis, with final (i.e., unconditional) transfer of securities from the seller to the buyer (i.e., delivery) occurring at the same time as final transfer of funds from the buyer to the seller (i.e., payment). Example systems using this model include Euroclear in Belgium and Clearstream in Germany.
2. DVP Model 2 (gross settlement of securities, net funds transfer): Systems that settle securities transfer instructions on a gross basis, with final transfer of securities from the seller to the buyer (i.e., delivery) occurring throughout the processing cycle, but that settle funds transfer instructions on a net basis, with final transfer of funds from the buyer to the seller (i.e., payment) occurring at the end of the processing cycle. Example systems using this model include DTC in the United States and CDS in Canada.
3. DVP Model 3 (net simultaneous settlement): Systems that settle transfer instructions for both securities and funds on a net basis, with final transfers of both securities and funds occurring at the end of the processing cycle. Example systems using this model include CETIP in Brazil and CDSL and NSDL in India.

Depending on the market, securities may settle on the same day that the transaction is made (called trade date plus zero, or T+0, in industry terms) or may settle on a fixed number of days after the trade date, such as T+3. Settlement conventions vary considerably by jurisdiction and even within jurisdictions. For example, in Europe, equity securities settle T+2 and government securities settle T+1.

Securities Safekeeping Intermediaries

Figure 7.8 highlights the different types of relationships that customers (i.e., buy‐side institutions, broker‐dealers, etc.) can have with the key intermediaries in the securities safekeeping layer, which include CSDs, ICSDs, and global/local custodians.

The important points to note are that:

• Securities are ultimately held in book‐entry form at national Central Securities Depositories (CSDs). CSDs in many (but not all cases) limit the types of institutions that can be members of the depository and hence most institutions and individuals must obtain the services of an intermediary to perform securities safekeeping services on their behalf.
• Typically, only local legal entities are allowed access to a country's CSD (the main exception being links with other (I)CSDs). As a result, international customers wishing to hold securities and settle securities transactions will need to do so through a local custodian or through a global custodian or ICSD that has sub‐custody relationships with a local custodian or direct links to the national CSD.
• For large, global institutional asset managers, there is a clear efficiency gain to hold securities with a global custodian, who can provide custody and settlement services to a wide variety of markets through a network of direct and sub‐custody relationships.
• Importantly, the ultimate location of settlement (i.e., where book‐entry transfer actually takes place) is often a function of where the counterparty to the trade has its account. For example, if the buyer and seller of a security both have an account at the same global custodian, no settlement will take place at a CSD. The transaction will merely be settled internally at the global custodian.

Many good books have been written on the topics of global custody and safekeeping, so we will focus the rest of this section on providing a brief overview of the key market infrastructure institutions providing securities safekeeping and settlement services, namely:

• Central securities depositories (CSDs)
• International central securities depositories (ICSDs)
• Custodians (covering both local and global custodians)

CSDs

A central securities depository (CSD) is an organization holding securities in the lowest level in the securities safekeeping chain. CSDs maintain source records about which securities exist and who owns them. Today these records are in electronic form in order to enable their book‐entry transfer, that is, changing of the ownership of securities electronically without the movement of physical documents. CSDs generally also provide other services around settlement and custody. In most jurisdictions, CSDs are still largely national monopolies and as a general rule every country has one dominant institution CSD. However, exceptions to this rule do exist, as is the case in India, where there are two national CSDs, each affiliated with one of the two national securities exchanges.

CSDs provide several core services to their clients, including:

• Safekeeping: The primary function of a CSD is the safekeeping or custody of securities. A CSD may include safekeeping for one type of security (e.g., equities) or multiple types (e.g., equities and corporate bonds).
• Settlement: The transfer of ownership between participants in the CSD will take place in book entry form at the CSD through its securities settlement system.
• Income collection: The CSD will collect dividend and interest payments from a security issuer's paying agent and ensure that these payments are credited to participants holding the respective security.
• Corporate actions: The CSD is responsible for processing any corporate actions, such as stock splits and dividend payments, working with issuing and paying agents to do so.

ICSDs

An international central securities depository (ICSD) is a special type of central securities depository that was originally set up to settle Eurobond trades but has since evolved to facilitate the settlement of international and various domestic securities. Clearstream Banking in Luxembourg, Euroclear Bank in Germany, and SIX SIS in Switzerland are considered ICSDs.

Since their creation over 40 years ago, the business of ICSDs has expanded to also cover most European domestic and internationally traded instruments, including investment funds. They usually operate through direct or indirect (via local agents) links to local CSDs. Clearstream and Euroclear together dominate the European ICSD market.

ICSDs are similar conceptually to CSDs, in that they facilitate the safekeeping and settlement of securities. However, one major difference between these entities is that the ICSDs are structured as banks whereas CSDs as not. As a result, ICSDs are able to provide credit to its participants as well as provide other banking services related to securities settlement that many CSDs are not able to provide.

The ICSDs provide a variety of services, many of which are highly overlapping with that of CSDs:

• Notary/issuer services: Initial bookkeeping to enable book‐entry transfer, assistance in setting up a new security, and shareholder identification
• Settlement: Domestic and cross‐border settlement in bonds, equities, and funds, both on‐exchange and OTC
• Custody: Safekeeping of physical and electronic securities, administration, asset servicing and corporate actions (dividend, coupon, proxy voting, etc.), and tax advice
• Deposit and withdrawal: Services involving a relationship between the transfer agent, issuers, and the CSD; also covers the CSD's role in the underwriting process
• Collateral management and lending: Services such as securities lending and borrowing (as agent and principal), collateral management, tri‐party repo, repo margin management, and derivatives margin management
• Banking services: Specialized foreign exchange services, cash management, securities financing, and account services (subject to banking license requirements)
• Other services: Reporting, accounting connectivity, fund management, and information services

Custodians

Custodians are banks that provide access to clearinghouses and CSDs for their investor clients. They act and hold accounts on behalf of their clients and keep their clients' assets under custody, which essentially means safekeeping and servicing them. Custodians are referred to as global custodians if they also provide asset safekeeping services for their clients across multiple jurisdictions. This is done via accounts at multiple local CSDs covering most geographical markets or by using local sub‐custodians. The largest global custodians include BNY Mellon, State Street, JP Morgan, Citi, and BNP Paribas.

Local custodians, also called regional custodians, are banks that provide sub‐custody services to global custodians or custody services directly to local and foreign investors. Regional custodians are typically present in only their local market and do not have access to a range of CSDs. Moreover, they typically provide a more basic service offering than global custodians.

Exchange‐Traded Derivatives (ETD)

The market infrastructure for ETD is relatively consistent across jurisdictions. Trade execution for ETD occurs exclusively at derivatives exchanges, where contracts are standardized and where trades are typically executed via an electronic trading platform operated by the exchange. Trading parties typically remain anonymous. Since derivatives are created by the exchange, executed trades will either add new open contracts (i.e., new open interest) or offset existing open contracts.

Once trades are executed, a derivatives clearinghouse, which may or may not be owned and operated by the derivatives exchange, will manage the clearing process and typically also step in as a central counterparty (CCP). The CCP manages risk at a participant level, collecting margin as required for open positions and generating settlement instructions for any required payments or deliveries.

In most countries, including the United States, the trade reporting function is performed by the derivatives exchange and/or CCP, although in Europe reporting to an ESMA‐registered trade repository is mandatory for both ETD and OTCD trades.

Derivatives Exchanges

Trading and execution of exchange‐traded derivatives occurs on derivatives exchanges. Exchange‐traded derivative products consist predominantly of futures and options contracts on a wide range of underlying reference assets, which include: equity securities and ETFs,⁸ commodities, currencies, and interest rates.

Derivatives exchanges historically focused on a limited subset of underlying asset classes, although acquisition activity over the past two decades has led to significant industry consolidation. The largest global derivatives exchanges are now part of exchange conglomerates, which may include multiple derivative and security exchanges. For example, the Intercontinental Exchange (ICE), after its acquisition of the New York Stock Exchange, now owns and operates several commodity futures exchanges as well as several security and equity derivatives exchanges. Similarly, the Chicago Mercantile Exchange owns and operates four derivatives exchanges whose contracts cover futures and options spanning currencies, rates, commodities, and stock indices. Figure 7.10 provides an overview of some of the major derivatives exchanges by number of futures and options contracts traded in 2015.

Trading Platforms for OTC Derivatives

OTC derivative contracts were historically exempt from regulation and traded over the counter on a bilateral basis between counterparties, rather than on regulated exchanges. Derivative dealers would create derivative contracts on behalf of their end‐user clients as well as create contracts with other dealers to hedge residual risk or to take on a risk position. Contract terms could be negotiated and customized based on the needs of the end‐user client or risk being hedged. Much of this business was conducted by voice over telecommunications networks with limited transparency into the market, in stark contrast to markets traded on regulated exchanges.

This lack of transparency was identified by regulators as a major contributor to the global financial crisis, as regulators and market participants did not have adequate information to identify and assess market exposures and counterparty relationships. Accordingly, the leaders of the G20 nations made a commitment to migrate all standardized derivative contract trading to electronic trading platforms. An increasing percentage of OTC derivative contracts that are more suitable to standardized terms are now being traded on electronic platforms. More exotic, bespoke OTC derivatives are still traded bilaterally, given the need to tailor terms to the specific needs of the counterparties involved.

Implementation of the G20 commitment to migrate most standardized OTC derivative contract trading to organized trading venues is underway, although progress is uneven across jurisdictions.¹⁰ As of early 2016, the United States, European Union, and Japan were the furthest along in implementation.

United States: Swap Execution Facilities (SEFs)

• In the United States, the Dodd Frank Act introduced the legal requirement that standardized OTC derivatives eligible for clearing also be traded on electronic facilities. These facilities, called swap execution facilities (SEFs), are multilateral trading venues that feature multi‐dealer request for quote (RFQ) functionality as well as operate an open limit order book (LOB).
• Development of the regulatory framework to implement the SEF requirement was left to the CFTC and SEC, with the CFTC covering non‐security‐based swaps and the SEC covering security‐based swaps, respectively. To make matters somewhat more complicated than they ought to be, each regulatory body has taken their own approach to implementing these rules, with the:
  • CFTC finalizing its rules on SEFs in June 2013 and implementing in February 2014 a mandatory trade execution rule for certain interest rate and credit default swaps subject to the CFTC's clearing requirement.
  • SEC proposing rules on the registration and regulation of security‐based SEFs in February 2011, but with no final rule yet released as of the beginning of 2016
• SEFs have already begun changing the market structure of the OTC derivatives market in the United States. Most notably, SEFs have:
  • Increased pre‐trade price transparency and competition by allowing market participants to compare prices from multiple dealers on one platform
  • Changed the relationship between dealers and end‐users by permitting end‐users to compete directly with dealers in the provision of liquidity

Data exists on the transaction volumes at U.S. SEFs since the 2014 trade execution mandate. As highlighted in Figure 7.11, notional value traded on SEFs has remained relatively constant across the three major swap categories.

In theory, the new SEF rules were designed in part to create new opportunities for other market entrants to compete within the execution segment for OTC derivatives. However, in practice, the majority of the new SEF entrants are in fact incumbent electronic inter‐dealer brokerage platforms that have been repurposed to adhere to the SEF rules, as highlighted in Figure 7.12.

ETD Clearinghouses

Exchange‐traded derivatives such as futures and options are almost universally centrally cleared by a clearinghouse, and in many cases that clearinghouse will also act as a CCP. The clearinghouse may be part of the same organization as the exchange, as is the case at CME and ICE, or may be a separate independent organization, as is the case with U.S. equity options that trade on multiple U.S. exchanges but are cleared at the Options Clearing Corporation, an industry‐owned utility.

Members of the derivatives exchange may or may not also be members of the associated derivatives CCP. In the case where an institution is a member of the derivatives exchange but not of the ETD clearinghouse, the institution must access the clearinghouse through an intermediary, called a general clearing member. A General clearing member is a financial intermediary that provides clearing services both for its own account and for clients, as opposed to a clearing member, which may only provide these services on its own account.

In some cases a client may have an execution broker that is different from the general clearing member that is acting on their behalf to clear trades at the clearinghouse. Responsibilities of the general clearing member in relation to its client differ by jurisdiction. In general, in Europe there is more of a principal model where the general clearing members act as principals on behalf of brokers. In the United States, there is a pure agency relationship between the general clearing member and its client, with a broker's margins being channeled through the general clearing member on a gross basis.

There are several key functions that a derivatives CCP must perform with the most crucial ones being:

• Registration and novation of the transaction: Once a derivatives trade is submitted to the derivatives clearinghouse, if it is acting as a CCP, the clearinghouse will insert itself between the buyer and seller through a process known as novation.
• Collection of initial margin: At the onset of the trade, the CCP will ask for a deposit on open positions, called initial margin (IM), which can be in the form of CCP‐eligible securities or cash.
• Periodic collection of variation margin: Over the life of the contract, the CCP will collect periodic variation margin (VM) payments based on the profit or loss on open positions. VM is typically calculated at least daily and is usually settled in cash.

It is important to note that ETD clearinghouses usually calculate margin payments on a portfolio basis rather than on an individual contract level. In this way they are able to take into account relationships between positions that result in netting benefits.

OTCD Clearinghouses

OTC derivatives clearinghouses have been around for some time. For example, LCH.Clearnet has been clearing OTC interest rate swaps since 1999. However, OTC derivatives clearing has gained significant momentum in recent years given the G20 policy objective around the clearing of OTC derivatives.

OTCD clearinghouses function in the same manner as ETD clearinghouses, with respect to the core clearing and settlement functions. The main difference is that OTC derivatives by definition do not trade on‐exchange and hence must be submitted to the OTCD clearinghouse. In several cases market participants have several OTCD clearinghouses to choose from.

As Table 7.4 highlights, there are a large number of OTCD clearinghouses that will clear the five core OTC derivative products. The majority of these OTCD clearinghouses are existing ETD clearinghouses that are now offering services to clear OTC derivatives. Pooling ETD and OTCD positions at one clearinghouse may in some cases come with margin efficiencies where there are offsetting risk exposures.

While OTCD clearing has gained momentum recently, there is still a significant way to go before there is widespread market adoption. As we have discussed previously only a few jurisdictions have put in place trading and clearing mandates for OTCD. Accordingly, this segment of the market infrastructure is likely to continue to evolve as regulations are finalized and market participants settle on an acceptable market structure.

Trade Repositories

Trade repositories capture and retain key trade‐level information related to open OTC derivative contracts. Depending on the jurisdiction, trade repositories may also collect data on exchange‐traded derivative transactions, as is the case in the European Union, giving regulators a complete picture across both the ETD and OTCD markets without the need to aggregate data from multiple sources. Trade repositories provide services to both market participants and regulators, which include:

• Acceptance and confirmation of data, which may come from multiple sources, including derivative exchanges, derivative clearinghouses/CCPs, SEFs/OTFs, or directly from market participants.
• Recordkeeping and storage of the underlying transaction‐level data.
• Public and proprietary reporting on the underlying data collected; in some jurisdictions, such as the United States, this includes near real‐time dissemination of data.
• Maintenance of data privacy and integrity; and provision of access to regulators for reporting, monitoring, and analysis purposes.

As Table 7.5 highlights, many of the larger trade repositories are subsidiaries of existing market infrastructure providers, including derivatives exchanges, (I)CSDs, and SEF operators. As OTC derivatives trade reporting regulations were first implemented in the United States, market infrastructure providers headquartered in the United States have had a head start in developing the requisite infrastructure and accordingly have a broader presence across jurisdictions as they were able to largely leverage the infrastructure built for U.S. swap data reporting purposes. DTCC in particular has built a global network of regulator approved OTC derivative trade repositories and now operates across seven jurisdictions.

Differences between U.S. and European Implementation

In the United States, trade repositories are known as swap data repositories (SDRs), as defined in the Dodd‐Frank Act. SDRs must be registered by either the CFTC or the SEC, depending on the type of swap. Only OTC derivatives are required to be submitted to SDRs, as regulators have access to exchange‐traded derivatives data directly from the derivatives exchanges. While there are two parties to each swap transaction U.S. regulators require submission from only one to satisfy the trade reporting requirement. This simplifies submission, particularly for swap end‐users that are not financial institutions.

Within the EU, ESMA has direct responsibility for the registration, supervision, and recognition of trade repositories. In contrast to the United States, the trade reporting requirement extends beyond OTC derivatives to exchange‐traded derivatives, and submission requirements extend to all market participants, including both financial and nonfinancial participants. Both parties to a given derivative transaction must report their trade, creating duplicate submissions.

European trade repositories are obligated to report aggregate position and notional statistics publicly. Figure 7.13 provides an overview of the relative size of the six currently registered trade repositories operating in the EU based on the number of open OTC derivatives positions currently reported. DTCC's global trade repository is currently the largest by position count and captures a significant portion of dealer‐reported OTC derivatives trades, particularly those that are not currently cleared. Univista, CME, and Regis all complete largely through capturing captive trade reports through their relationships with existing OTCD clearinghouses.