Reporting of derivatives to trade repositories has now been defined in the technical standards that ESMA has published at the end of 2012. The content of what needs to be reported is now a lot clearer to market participants. Nonetheless, a number of challenges and ambiguity remains, says Tom Riesack of Capco
Since the end of last year trade reporting under EMIR has become a lot clearer to market participants in the European Economic Area (EEA). On December 19th 2012, ESMA published the ratified regulatory (RTS) and implementing technical standards (ITS) that govern regulator’s expectations with regard to the content and format requirements of reports sent to trade repositories.
The standards are available in English, German and French, which should ease dissemination and make them much easier to digest by participants in the derivatives market. And as to the overall required sections there were no surprises as they encompass, as expected, trade details, valuation data, confirmation details, collateral linkage and clearing aspects. My experience with clients shows that drafting an initial version of a business concept from these standards is pretty straight-forward.
And if this sounds too good to be true – well, then it probably is.
The devil is in the detail of the required information but there are also a number of other challenges that need to be overcome by participants in the derivatives market to be able to adequately report in a compliant fashion.
Different to the reporting requirement under the Dodd-Frank Act, EMIR requires the reporting of not only OTC derivatives trades but all derivative trades, including listed options and futures. One of the biggest challenges for market participants therefore will be to bring together the required data from a wide and diverse range of systems, including trading and settlement system as well as confirmation and collateral management systems. With data management not always being the forte of financial institutions (as Capco has uncovered in a recent survey) identifying the relevant data in the various systems and consolidating them can be a huge task.
A sensible approach could be to create a dedicated data hub for trade repository reporting, where data is collected, normalised, enriched and then made available for distribution. Such a data hub could have additional benefits:
• it enables reporting to more than one trade repository,
• can create relevant internal management reporting,
• helps running queries (for example to understand what portion of the business is cleared; to run queries like what kind of trades are not being cleared in terms of tenor, size, etc.) or
• help with monitoring US-centric activity, e.g. to understand if the ‘de minimis threshold’ for swap dealer registration has been breached.
A different challenge arises as a number of required fields are completely new. Some of them are related to clearing, which a large part of the trading community is not (yet) doing. Other new fields are client-specific, e.g. “clearing obligation”, “intragroup”, “master agreement version”, others again are specific to the clearing process (e.g. “confirmation timestamp”, “cleared”). These fields need to be populated either in existing databases or need to be set up separately to be added to the reporting data.
Other reporting requirements present banks with a different set of challenges. EMIR would like to see the Legal Entity Identifier (LEI) being reported as the ID of the counterparties to a trade to understand the risk profile of single counterparties and groups. Alas, the LEI is not available yet and with the governance being proposed to be put in place in March this year it is questionable if every relevant counterparty has been assigned a valid LEI in time for the envisaged reporting start date of July 2013.
So what can banks report instead? BICs are a possibility, even own IDs. But it can be assumed that these need to be substituted once LEIs become the norm. Another possibility might be the CFTC Interim Compliant Identifier (CICI) which has the same format as the proposed LEI – but will they stay valid?
As a final example EMIR asks for the ‘type of confirmation’ where one value is ‘electronic’ – does this mean confirming via an affirmation platform like MarkitWire only? Or does it also mean email or even fax?
Some ambiguity is left that needs to be clarified. As such banks are well advised to engage with the trade repository of choice to understand how, when and in what way the repository expects the data and how certain fields need to be interpreted.
With less than half a year before the reporting obligation will enter into force market participants need to act now and ensure that the business function works closely together with the IT function. Non-compliance is not an option.
