DerivSource’s Julia Schieffer talks to industry experts about the challenges of aggregating trade data to support new swap trade reporting requirements under new OTC derivatives regulation. Comments from a recent DerivSource webinar.
New requirements for swap trade reporting under the new OTC derivatives regulation aim to facilitate greater transparency in the markets, however, sourcing the data and standardising data formats for trade reporting introduces a raft of challenges for financial institutions.
The real data challenge for financial institutions begins with how they deal with new categories of data, such as legal entity identifiers (LEIs), and in turn how existing trade data is standardised in a manner that fulfils regulatory mandates, said Anthony Belcher, director, EMEA Valuations at Interactive Data.
He said: “Firms are going to have to understand exactly how they are getting those standard data items that will be used in some of the reporting and where they are going to source those from. So, firms are going to want to work through how they are collecting that data and how they are able to format information in a way that makes sense within the internal data repositories.”
What complicates data aggregation further is the difficulty firms face when managing data requirements to support trade reporting when different jurisdictions (and their trade repositories) have varying data format and standards firms must abide by. In short, there is currently no global standard for data requirements and formats for reporting trades to trade repositories as required by new regulation for multiple jurisdictions, and this fragmentation is especially prevalent in Europe compared to the US where the Depository Trust & Clearing Corporation’s (DTCC) is hosting the trade repositories for credit and interest rate derivatives, explains Belcher. “The DTCC is doing most of what you would expect to see in the US, but within Europe you’re likely to end up with a degree of fragmentation,” he said.
Europe, from a technical perspective, will face possible difficulty in obtaining a more holistic view of the market if fragmentation exists among various market infrastructures including swap execution facilities (SEFs), clearinghouses and trade repositories all designed to support different countries and/or asset classes.
“How are firms aggregating different data formats, different files or different feeds and to support different market structures that may link up to trade repositories?” Belcher asked. “Practitioners need to deal with trying to put all these links in place and connect into the trade repositories to get an idea of what’s going on in the market,” he added.
Internally, some sell-side institutions will lack a centralised system to manage trade-reporting requirements due to their historical silo-based structure. A lack of a centralised trade reporting facility will multiply the effort required to meet trade reporting requirements, explains Judson Baker, senior vice president and product manager at Northern Trust.
He said: “If you look at how dealers have historically been set up, you have different trade silos: one for rates, one for credit, one for equities, commodities and so forth. So, it could be the case where [firms] have different systems without having a centralised point of data retention and reporting,” said Baker.
Larger hedge funds may have allowed each strategy to have the liberty to choose whatever derivatives system they want, smaller ones tend to use one centralised derivatives system so they are likely to be better able to readily store, retain, and then to report the data, requiring one build instead of multiple builds, Baker adds.
The strict deadlines for trade reporting introduces additional operational burden for financial institutions when sourcing and preparing data for reports. Some of the operational challenges come from current practices, and specifically how and when the data is captured and how data enrichment occurs throughout the life cycle of a trade, explains Andrea Stefanescu, a Senior Manager with Ernst & Young’s Financial Services Office in New York.
She said: “Through these new rules and requirements there are specific timing requirements for reporting so a trade has to be captured and data has to be available to be reported within specified time frames which drive additional challenges [for financial institutions].”
This article is provided for information purposes only. Nothing herein should be construed as legal or other professional advice or be relied upon as such.
