Derivatives reporting has been subject to a relentless change agenda, with an ongoing wave of global rewrites and refits forcing firms to look closely at their transaction reporting, reconciliation and assurance testing capabilities. Bob Currie reports on primary implications in the US, Europe and UK.
Phased implementation
Reflecting on this implementation agenda, Kaizen Reporting’s Director of North American Reporting Alan McIntyre suggests that one of the main challenges for reporting firms has been in adjusting to the sheer pace of change. A global firm is required to manage and balance these implementations across a number of jurisdictions. The first phase of the Commodity Futures Trading Commission (CFTC) ReWrite was implemented in December 2022, with the European Market Infrastructure Regulation (EMIR) Refit enacted in the EU and UK respectively in April and September 2024.
In the Asia-Pacific region, the new Japan Financial Services Agency (JFSA) reporting rules also came into effect in April 2024, with the Australian Securities and Investment Commission (ASIC) and Monetary Authority of Singapore (MAS) Rewrites following in October 2024. The Hong Kong Monetary Association (HKMA) implementation is still to come.
The CFTC Rewrite has been staged through a number of phases. After going live with the initial Rewrite, the Unique Product Identifier (UPI) was added to the reporting template in January 2024. CFTC was the first regulatory implementation to adopt the UPI, but this was a full 12 months after the original Rewrite. It then introduced a number of other amendments, including the addition of a UPI – and a number of other new reporting fields – for commodity derivatives transactions. The implementation date for these changes is still unconfirmed. It seems likely that it will take at least a further 12 months to complete this implementation, observes McIntyre, although the industry is currently pushing for 18 months.
Tim Hartley, Director of EMIR Reporting at Kaizen Reporting, believes that, on balance, reporting firms have risen well to the challenge of managing these regulatory reporting implementations. It has been encouraging to note the level of collaboration between firms, and their involvement with industry associations, in sharing their experience, identifying best practice and in working through areas where the reporting implementation may be problematic.
While firms have broadly met the challenge of reporting trade data into the trade repository (TR), Hartley is clear that the hard work still continues from this point. “Although the firm may be meeting validation rules, it is possible that their reporting may be valid but wrong,” he says. Consequently, reporting firms must continue to review their reporting procedures after implementation deadlines to ensure that these are fit for purpose.
EU and UK EMIR Refits
Reporting firms were given six months from implementation date for the EU and UK EMIR Refits to backfill legacy contracts. Evaluating their progress, Hartley observes that for the EU EMIR Refit, there is still a portion of trades that are in the old format – more than six months on from the 29 April enactment date. In October, close to 15% of the open population still needed to be amended into the new format for EU reporting. As such, the firms involved were not compliant with EU EMIR for this body of transactions, he notes.
For the UK implementation, which took effect in September, roughly 50% of the open population had, at the time of writing, been amended to the new format, adds Hartley.
Beyond this, firms are working to prepare and to respond to the Day Two book of work. Additional regulatory guidance, consultation papers and other Level III documentation amounts to more than 1000 pages. This is a major undertaking, even for firms that are well on top of their reporting requirements and have a dedicated team to manage this transition.
No doubt, the industry is getting better at these regulatory reporting implementations, observes McIntyre. They have learnt from previous ‘go lives’. They are getting better at the buy-versus-build decisions – evaluating what they should manage in-house and when it makes sense to draw on the expertise of a third-party reporting specialist.
Trade associations are also doing important work in advocating for the industry and taking steps to clarify requirements. These are evaluating and collating the regulatory guidance, identifying critical data elements (CDEs), integrating feedback from their members and then working through these issues with implementing associations, for example ANNA DSB for UPI.
Each of the G20 Rewrites that we have highlighted in this article are adopting CDE. “This has encouraged harmonisation,” reflects McIntyre, “but each is adopting CDE in a slightly different way. At Kaizen, we prepared a data map of which CDE fields apply to which regulations and this document became complicated very quickly.”
CFTC was the first to publish a CDE with the 2022 Rewrite. However, it has subsequently published a revised specification which has 49 new fields, which do not align with the common data elements recognised internationally. In turn, the Canadian regulator has adopted a number of European Securities Market Authority (ESMA) fields in their Final Rules which will be applied in July 2025.
Kaizen’s Hartley indicates that other regulators globally, including ESMA, the UK Financial Conduct Authority (FCA), ASIC and MAS, have tried to be consistent in their use of critical data elements and CFTC is something of an outlier in this respect. The EMIR Refit offers additional complexity because it involves reporting for both over-the-counter and exchange-traded derivatives (ETDs). These reporting rules have been written principally with OTC derivatives reporting in mind and ESMA and the FCA have worked to apply that rule set on to ETDs. “This is a good foundation for harmonisation,” he concludes.
In conducting its annual Global Regulatory Reporting Survey, S&P Global finds that the regulatory reporting market is challenged currently by significant operational burdens and continued use of manual and ad hoc processes.
The use of manual processes is slowing down effective improvements in data quality, the report states, reducing efficiency and taking human resources away from value-added, higher priority tasks. It finds that 37.5% of respondents are taking more than 10 hours per week to handle reconciliation, with nearly 14% taking more than 20 hours.
Well over half of respondents indicated concerns regarding the quality of the data they are submitting for regulatory reporting purposes. This reflects the market’s growing appreciation that each firm must take full responsibility for data quality, whatever the original source.
The focus on improving data quality is driving a range of solutions and processes, says the S&P Global report, but many are not fit for purpose. Commenting on the checks they are doing to ensure that submitted data is complete, accurate and timely, 61% responded that they are employing internal spot checks for some or all their needs and 32% are relying solely on TR validations.
However, TR validations cannot take business context into account, concludes the report, and these are unlikely to address scenarios in which data might be accepted by the TR but the reported data does not accurately reflect the underlying trade. In turn, manual checks are notoriously prone to error, the report suggests, and are “not an objective way of checking data over time, relying too heavily on the specific expertise of identified individuals”.
Commenting on the report, Struan Lloyd, Head of Cappitech at S&P Global Market Intelligence, concludes that 2024 has been a particularly intense year for regulatory reporting changes. “A focus on operational processes, and ensuring effective implementation and long-term accuracy, is unsurprising,” he says. “While there’s still a heavy reliance on manual and ad hoc processes, the growing willingness to leverage sophisticated technologies and artificial intelligence is a sign of further maturity in this market.”
Data quality and regulatory oversight
To monitor the quality of reported data,ESMA and the National Competent Authorities in the EU have implemented a data quality dashboard that monitors 19 data quality indicators. This provides a semi-automated process for identifying errors, monitoring reporting accuracy across the wide community of reporting firms. This, notes Kaizen’s Hartley, offers prompt indication of what is going right and what is going wrong in firms’ reported data.
Alongside this, major users of this reported data, such as the European Central Bank, are monitoring data accuracy and, when they identify problems with data quality, they can be expected to bring this to ESMA’s attention.
In the UK, the FCA has been resourcing heavily to monitor reported data, employing a team that evaluates EMIR and Securities Financing Transactions Regulation (SFTR) reported data in a similar way to the service provided by its Markets Data Processor (MDP) facility.
In the US, CFTC has imposed a number of fines on firms for reporting failures. It has also announced new enforcement powers at the end of 2023 where it will be targeting firms that it identifies to be ‘recidivist’ – notably firms that are failing to take necessary action to fix their data issues and poor reporting quality.
Additionally, CFTC has set in place Part 49 requirements which require firms to be conducting a monthly accuracy check – a monthly reconciliation against their trading book – and to fix any errors or incomplete reporting within seven days. If a problem cannot be fixed during this timeframe, the firm will be expected to bring this problem to the CFTC’s attention.
Alongside a primary focus during 2025 in helping clients to prepare for the expansion of US Treasury clearing and for moves towards accelerated settlement in the EU and the UK, DTCC Managing Director and President for Clearing and Securities Services Brian Steele indicates that DTCC will be actively supporting users through regulatory change efforts that impact its Repository and Derivatives Services (RDS) division, including the rewrite to Canadian trade reporting rules, JFSA Phase III and the HKMA Rewrite.
Related Reading:
The Next Chapter – APAC Rewrites – Derivsource
Derivatives Trade Reporting: Why Industry Partnerships Might be Right for APAC Firms – Derivsource
2025 Regulatory Roundup – The Never-ending Roundabout – Derivsource
