Information services firms see potential business in derivatives market reporting

Companies say Treasury should require data in standard format to increase transparency and public access.

Some information services companies are optimistic that recent proposals by the Treasury Department to increase transparency in risky derivatives markets will open up new business for them. Derivatives, financial contracts whose value is based on other underlying assets, are largely unregulated and have been blamed for contributing to the nation's financial crisis.

On May 13, the Obama administration proposed ideas for policing over-the-counter derivatives trades that include requiring dealers to report data on individual trades to regulators and to provide aggregated data on trading volumes to the public. But Treasury has stopped short of suggesting public release of data on individual trades, which some firms could capitalize on by offering their reporting services.

Philip Moyer, CEO and president of EDGAR Online, an information services company, said the government should consider requiring banks and dealers to provide raw data on individual trades both to regulators and the public in standard format XBRL (Extensible Business Reporting Language). Such uniform coding would allow the data to be searched and shared between Web applications.

"The big problem is that regulators say, 'We want transparency. We want banks to report,' and we get reams and reams of incompatible data. And you need people to go through and sort that data," Moyer said.

Should Congress and the administration agree to demand public access to raw XBRL data on individual trades, "you're going to see a thousand business models bloom," he added.

Individuals, nonprofits and firms could download that data, combine it with other data sets and analyses, and then sell or offer it for free online. For example, examining the number of contracts held in one sector of the economy could pinpoint where hazardous risks were accumulating in time to prevent a meltdown.

Financial firms also should be allowed to enter this market, according to Moyer. "They may have insights into the likelihood of default that arguably investors could benefit from, he noted.

One such company, the Depository Trust and Clearing Corp. -- which processes OTC derivatives trades and provides data to traders -- declined to speculate on specific information that the government would or would not publicly release.

"We are certainly working with the industry and with regulators to meet the objectives of what Treasury is looking for -- which is a safe, sound marketplace for OTC derivatives," said DTCC spokeswoman Judith Inosanto.

XBRL specialist Neal Hannon predicted that data aggregators, business information companies such as Bloomberg and the banks themselves likely will jump into the reporting space.

"I think it has potential for opening the black box and shedding some light into that area of trading," said the Manville, R.I.-based consultant who has helped companies understand federal XBRL rules. "Everything that comes out of the banks will be a little bit suspect. If they want to sell it as credible information, fine. But buyers should look for outside verification."

The two major hurdles to formatting in XBRL are agreeing to a common set of data elements and then coding them all quickly to report the information live, he said.

But Markit, a financial information services company, says it has the know-how and experience to launch such a public reporting platform for OTC derivatives trades now. The firm, which is part-owned by major derivatives dealers, is already in the data disclosure business with a reporting platform for cash equity trades, called BOAT.

"We have a tremendous amount of institutional knowledge around derivatives, which is going to be critical as you pull together a global trade reporting framework for OTC derivatives," said Armins Rusis, Markit's executive vice president and co-head of fixed income.

Markit can make OTC derivatives data available in whatever fashion the market decides it should be, including XBRL, Rusis added

As to whether the public should be skeptical of reporting provided by a company partly owned by dealers, he said, "we've always operated as an independent company that promotes transparency and liquidity among counterparties. We're not going to define what trades are to be reported, across what asset classes -- that is for the market and the regulators to define."