Interactive Data’s Anthony Belcher offers his quick views on what organisations should be focusing on in ‘phase 3′ of EMIR trade reporting. Insight from the Sept podcast on “EMIR Trade Reporting – Time to Refine Processes”
Introduction
Many financial institutions struggled to meet both the initial EMIR trade reporting deadline in February and the subsequent August deadline for reporting collateral and valuation data. Following the most recent deadline, firms are taking a step back to better understand the processes in place, and test these methodologies and workflows with the aim to improve accuracy, operational efficiency and reduce the likelihood of future problems. In focusing on refining EMIR trade reporting processing, firms should keep the following seven key points in mind.
1. Know where your information comes from
Firstly, the sources of valuations available for OTC derivatives vary and can be disparate, so when gathering and validating the data required for EMIR reporting firms need to clearly understand where the data is going to be sourced and how it fits with other data points, such as CCP provided prices.
Secondly, there are still a number of uncertainties over the sources of valuation. For instance, for firms using CCP-provided valuation data, they need to have a plan in place to determine how they should proceed should they get different valuations from the various CCPs they work with.
2. Delegated reporting is not delegated responsibility
It is important that asset managers or other firms who have delegated trade reporting remember that the responsibility and accountability for the valuation itself still remains with them. Those delegating need to be confident that what is being undertaken on their behalf is correct and accurate. This means buy-side firms who delegate, for instance, need to have a good understanding of the procedures in place to validate and check asset values and to provide the independent price and transparent process. This is where many firms use tools such as Interactive Data’s Vantage product to deliver that independence and transparency.
3. Mark-to-market valuation – make sure the process is transparent
EMIR trade reporting has a mark-to-market requirement in that the valuations of
both the trade itself as well as the collateral required, where possible, should be a market valuation, which means firms need to be able to show how this process takes place. Specifically, the regulator will go to firms to ask exactly what that valuation is, where it has come from, how do they get that and what process can be presented to show what was used to get that valuation? Therefore, the process of coming to this valuation needs to be transparent and absolutely clear.
4. You need to manage trade breaks
The focus for many firms isn’t solely within the trade reporting itself, but on managing the trade breaks as they pertain to disputes or discrepancies related to valuations. We are seeing increasing number of firms looking to third party organisations, as Interactive Data, to be able to provide that independent value so both firms can agree upfront to try and remove any sort of disagreement as to the value of both the trade itself as well as the collateral that they are posting for that.
5. Collateral is king but there is an impact on reporting
We used to hear that cash was king and now I think we’re hearing collateral is king, there is definitely an increased focus on the availability of collateral as firms focus on using the collateral they have as efficiently as possible. So, financial institutions are working out how to optimise collateral but they need to remember that as they are changing the collateral used for these trades, they will also have to adjust how they are reporting on those collateral uses within the auspices of EMIR.
6. Be consistent
Financial institutions need to ensure they are being consistent within the valuations they use across the board. For example, if firms are using a certain value within a fund net at a Net Asset Value (NAV) point, how are they consistent with both the valuations that they are reporting and with the fair valuation approach adopted?
7. Keep evolving as questions get answered
There are more questions and uncertainties derivatives market participants will need to evaluate in the coming months as they refine their EMIR trade reporting procedures. So, organisations should stay tuned and adjust as new answers come to light. This is an evolving space and the work is not yet over.
For more insight from Anthony on EMIR trade reporting, please see the DerivSource September podcast available online or via iTunes
