Post-financial crisis reforms introduced by the G20 in 2010 aimed to increase transparency and reduce risk in the global derivatives markets. Significant strides have been taken at the local level and valuable data insights are now accessible across various jurisdictions, yet there is still work to be done to achieve the level of transparency and global risk monitoring deemed essential by the G20 more than a decade ago.
In a DerivSource Q&A, Matthieu Colet, head of transaction regulatory reporting team at Murex, discusses global regulators’ recent efforts to harmonise trade reporting across jurisdictions and promote greater transparency in the global markets, as well as the complexities involved for multinational firms in complying with a raft of new regulations.
Q: What does the convergence and harmonisation of regulation for OTC derivatives entail?
A: In 2010, the G20 agreed all 20 countries would create a role for trade repositories, but after that high-level description, the work each country did was not harmonised with other countries or regions. The content was not standardised across the regulations, which made it difficult to implement, especially for multi-entity banks. Even if the industry agreed mostly to use FpML, the format was not set out in the regulation. This lack of harmonisation led to many differences in terms of format and content, which led to bad data quality and did not allow the regulators to follow what happens in the market.
Convergence brough by rewrite programs aims to harmonise reporting standards across jurisdictions to make it easier for multinational firms to comply and for regulators to oversee the global market. The objective is to have one format and one content that can be shared across regulations to help both regulators and market participants.
“Convergence brought about by rewrite programs aims to harmonise reporting standards across jurisdictions to make it easier for multinational firms to comply and for regulators to oversee the global market. The objective is to have one format and one content that can be shared across regulations to help both regulators and market participants.”
Q: What is the roadmap for this regulatory convergence?
A: The roadmap for convergence involved first the content, then the identifiers, and finally the format. The international body CPMI-IOSCO was mandated to propose a way to harmonise trade reporting standards. It proposed there needed to be a critical data element, which is a state of 140 common fields that can be used by any regulation.
The international body also proposed a Global Unique Product Identifier (UPI) and Unique Trade Identifier (UTI) to identify individual products and transactions. Because one product can be involved in multiple transactions, this would be reflected in the data to better represent the market: For one UPI, there could be multiple UTIs. CPMI-IOSCO also recommended a common format – ISO 20022 – that is already used in financial services for purposes other than regulatory reporting.
Despite these recommendations, and the industry-wide adoption of these three components, there is not full convergence. Regional differences remain where local regulators have added additional data fields to their reporting requirements, but at least reporting is now easier for multinational entities. Reporting has been somewhat simplified, but several complexities remain.
Q: What approach are the regulators taking to achieve greater harmonisation?
A: The harmonisation recommendations are being phased in at different times across the globe over a period of four years. In North America, the CFTC and SEC and Canada began their rewrite with the implementation of the common data field first in December 2022, but did not include the UPI or the format ISO 20022, which itself was only created in December 2022. This allowed them to start the convergence process without waiting for all the pieces to be in place.
North American regulators were also the first to introduce the UPI for all assets (except commodities), when the new identifier, created by the designated institution the Association of National Numbering Agencies – Derivatives Service Bureau (ANNA-DSB), was ready for use. North American regulators went live with UPI in January 2024.
The Financial Services Agency of Japan (JFSA) implemented the critical data elements to the common fields and the ISO 20022 in April 2024, but did not yet include the UPI.
The European Union was the first jurisdiction to take a ‘big bang’ approach, implementing all three components in one go in April 2024. The UK followed suit on September 30, 2024, and on the same day, the JFSA increased the number of fields to reach its final content. The Australian Securities and Investments Commission will go live with the full scope in October 2024. In April 2025, Japan will implement the UPI, Canada will follow with its own regulation in July, and the Hong Kong Monetary Authority will implement its regulation in September. The US will also implement the format ISO 20022 and the UPI for commodities.
Even though it was difficult to achieve and there were discussions within the working group until the very last moment, all go lives went smoothly, and participants were able to report accurately on time.
Q: Can you discuss the complexities involved in this process?
A: It is difficult for a large bank to handle all use cases and do a big bang of all regulations at the same time. It is complex because firms must report using the old format before each go live and then with the new format thereafter. Multinational banks must handle several formats in parallel during this ramp up phase of global regulations until the last one goes live. However, it would also have been difficult to handle if there had a been a simultaneous big bang with everything going live at once.
Another source of complexity for firms is the fact that the UPI was completely new, so financial institutions had to learn how to communicate the information with ANNA-DSB.
Backloading—which refers to the requirement to report historical trades before the obligations came into effect—is also complicated, because when firms have a new format, they need to comply with the new format for the whole transaction. That can be complex because they may not have all the information on the old transaction, or they may have to do some corrections. It can take time to ensure the existing transactions and the existing reporting is up to date with the new regulations. This is why there is a transition period of six months in the US and Europe. Some jurisdictions have a shorter transition period.
The different behaviour between regulators also adds to the complexity. The rounding is not always the same between jurisdictions—sometimes they ask for decimals, sometimes percentages. The timelines are different, sometimes there are changes in the middle, sometimes new specifications are introduced a few months before they go live, with discussions about best practices continuing until just a few weeks before go live.
“Making sure they have the right data in the right place is crucial for firms to be compliant, which is in itself a very complex undertaking, and a major challenge for firms building this in-house.”
Q: How does Murex help firms manage all this complexity?
A: Making sure they have the right data in the right place is crucial. for firms to be compliant, which is in itself a very complex undertaking, and a major challenge for firms building this in-house. A major added value Murex offers its clients is its ability to map exactly between its data model and each jurisdiction’s requirements. Our clients can generate a set of data fields that is a superset of all possible fields and behaviours across jurisdictions, including the retrieval of UPIs through connectivity to ANNA-DSB. From this superset of reportable fields, Murex can generate for each regulation the corresponding message, picking and choosing the relevant data fields to send to the relevant trade repository.
This enables Murex clients to streamline compliance in a timely manner despite all these complexities they face, in a way that an in-house build might struggle. When building in-house, it can be difficult to find technologists who have the business expertise of where to find the data and what is required from a business and content standpoint. Because Murex knows its data model well and understands what the regulators are asking, it can offer a competitive advantage for firms over those building capabilities in house.
Q: In your opinion, has the goal of harmonisation been realised?
A: It is difficult to say as we are still in the middle of the process. The first big bang occurred in April 2024, just a few months ago. I would assume that using the ISO 20022 format with common data elements will increase data quality and reduce the mismatch rate. And if the data quality is enhanced, that will increase transparency and give higher visibility to the regulator, which is the whole point.
Q: What are the benefits for the industry from this harmonisation?
A: Harmonisation will reduce the operational costs of generating data. When data quality increases, mismatch rates will go down. This will reduce the time spent on analysing mismatches with counterparties. Because today, especially for dual sided reporting, both counterparties must report at the same time. If there is a mismatch, firms must look into where there are differences to see why the reporting is not the same on both sides. When this harmonisation process is complete, I expect there will be less discussion between counterparties and firms will spend much less time performing mismatch analysis.
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