The European Union regulation on derivatives, central counterparties and trade repositories introduces new requirements to improve transparency and reduce the risks associated with the derivatives market. It also establishes common organisational, conduct of business and prudential standards for CCPs and trade repositories. From 12 February 2014 all counterparties were required to report details of any derivative contract (OTC or exchange traded) they have concluded, or which they have modified or terminated, to a registered, or recognised, trade repository (TR) under the European Markets Infrastructure Regulation (EMIR) reporting requirements.
EMIR trade reports may only be submitted to trade repositories which are registered with the European Securities and Markets Authority (ESMA), of which there are currently six.
Mark Husler, CEO of one of the registered trade repositories, UnaVista, and Global Head Product Management at London Stock Exchange Group, believes that one of UnaVista’s key differentiators is that it offers firms full or partial delegated reporting to help ease and streamline the trade reporting process. Partial delegated reporting means that a counterparty could fill in 80% of the data fields on behalf of a client, and UnaVista can then flip the trade to make it dual-sided and allow the client to further enrich the data.
He says: “We continue to work closely with the regulators and the other trade repositories to move towards standardisation. We also offer a rules engine service which allows the customer to send their data from multiple sources into UnaVista in any format. The rules engine will then normalise it, enrich it with our own reference data, validate and reconcile and determine which trades need to be reported.”
WELL PREPARED BY MIFID
Husler believes UnaVista was well prepared for the go-live date, and that some customers went live on the trade repository ahead of implementation. As an Approved Reporting Mechanism (ARM) under MiFID he says UnaVista has good experience of trade reporting, unlike some other trade repositories entering the market, and Husler says having the necessary experience and flexible software to deal with the volumes experienced helped smooth the launch.
He adds that the UnaVista Rules Engine is a great way for firms to manage the administrative burden of multiple different regulations, not just EMIR. “UnaVista manages the connections and data formats, so the clients don’t have to. When changes or new regulations emerge the UnaVista Rules Engine can be adjusted to include them, saving the customer the financial burden of building separate tactical solutions for each regulation,” he says.
As a multi-regulation repository, Husler also believes UnaVista offers a good range of services whatever a firm’s reconciliation requirements are. He says: “We believe we are in a good position to help firms with their reconciliations as UnaVista was originally built as a matching and reconciliation platform, so we are very strong on this front. We have already seen some firms switch to our repository, which shows there is choice in the market, with different firms looking for a particular solution.”
He also believes experience counts when it comes to handling large volumes. Under MiFID, UnaVista processes around 1.5 billion trades a year, so Husler believes the trade repository is robust and has flexible technology in place to stand up to large volumes. Furthermore, being part of the LSE Group means UnaVista has a lot of experience of being a trusted, regulated business, and a customer’s data security is central to that. “Our data centre has the industry standard ISAE3402 security audit to ensure the highest level of security,” he adds.
Although trade reporting went successfully live in the first quarter, there is still a long road ahead. Husler believes regulations need to adapt and evolve with time to optimise the way they work and customers need a platform that is flexible and robust enough to adapt along with them. He says: “We think flexible technology, coupled with our background and experience in trade reporting, are two of the main reasons firms would choose UnaVista Trade Repository.”
UnaVista has been working with ESMA and the other trade repositories to continue to get this message across. There are still a lot of firms that need to request LEIs, a mandatory reporting requirement, so this has become the main focus now reporting is operational. UnaVista is also an approved Local Operating Unit for the allocation of LEIs.
As a provider of reference data, and through its Rules Engine UnaVista already offers ancillary services, as well as the fact it can offer assistance across a range of regulations, not just EMIR. London Stock Exchange is a Pre-LOU for LEIs and uses UnaVista to allocate the codes. It also stores a consolidated database of all the global LEIs so that customers can get all the data they need in one place. Says Husler: “We have been working with firms from day one on enriching data so that further down the line they can ensure their reported data is as accurate as possible.”
However, the fact that not all firms have an LEI, which is a mandatory field for reporting, is an issue that needs resolving as soon as possible so UnaVista is encouraging firms to request them if they have not already. “This is a big piece of regulation to enact so we always knew we would have to work closely with regulators and the industry, both leading up to the deadline and after it, to ensure any firms not reporting begin to do so as soon as possible,” says Husler.
From an early stage in the preparations for trade reporting, DTCC saw the value in promoting a horizontal model for trade reporting. This, says Stewart Macbeth, Chief Executive Officer of DTCC Derivatives Repository Limited, would enable DTCC’s clients to connect and report directly to the trade repository, reporting through their counterparties (where counterparties such as dealers offer delegated reporting) or report to DTCC through third parties such as IT and middleware providers. He says: “We have built an interface to over 30 service providers to ensure that clients can leverage their existing connectivity to these systems to report to us. We’ve also participated quite actively in discussions with regulators and other trade repositories to ensure our clients can benefit from a smooth reconciliation process. We have worked with five other repositories to establish a protocol to best achieve this. So at the end of T+1, we initiate a process of reconciling trades with other trade repositories and report back to our clients about any discrepancies. In addition, we are also working with regulators and peers on data standardisation to enable regulators to interpret it with greater ease.”
Macbeth says that the implementation of EMIR was operationally complex and unprecedented, due to the number of entities involved and the short implementation window. The industry as a whole went through a period of normalisation, but, he adds, the fact that market participants were able to submit 10 million trades to DTCC’s trade repository alone on day one, and 75 million by the end of the first week of reporting is indicative of the scale of the operation.
Going forward, Macbeth believes there are two medium-term issues around data capture that need to be addressed. One is the issue of lack of data standardisation and the second issue is fragmentation of data across trade repositories – both of which will make aggregation of data difficult. He says: “In Europe, data fragmentation has been addressed somewhat due to the need to reconcile among trade repositories, but if you then add the international dimension, the picture becomes more complex. As a global trade repository with a holistic view of the global derivatives marketplace, we believe that to get a meaningful data set from a risk mitigation perspective, the starting point should be defining regulatory goals, defining what information is needed and establishing cross-border agreements among regulatory bodies around data sharing. Infrastructures such as ours can then play a role in ensuring that this data is collected and delivered in a meaningful way and these are initiatives we are already working on.”
DTCC has recognised the diversity of participants when it comes to their size as well as scale and frequency with which they trade derivatives. As a result, Macbeth says the trade repository has put in place a pricing structure which reflects these differences. The same goes for the reporting methodology – provided clients adopt a DTCC template, they can submit reports via spreadsheet, CSV files or FpML format.
He adds: “Firms should take time to review their trade reporting models. For example, some firms may decide that the most cost effective method to report is to delegate their reporting to a third party or indeed their trading counterparty.”
Macbeth believes firms should look to use trade repositories that provide economies of scale and choice when it comes to reporting, as a way of simplifying the reconciliation and matching processes. For him, depending on the volumes of derivatives it trades, a firm may choose different reporting methods: low volume users may use a manual process such as a spreadsheet, medium volume users may choose to use a CSV file, while for high volume users FpML reporting may be a better choice. If a firm’s derivatives trading volumes shift significantly, they would have the choice of transiting between these three options – with manual and fully automated choices being at either end of this spectrum. “In addition to this, firms should take the time to review their reporting methods. For example, some firms may decide that the most cost effective connectivity option is to delegate their reporting to a third party or indeed their trading counterparty,” he adds.
As asset managers prepare to share trade data there are concerns that trade repositories should be taking steps to ensure data safety. Macbeth says DTCC takes data safety and confidentiality very seriously, only sharing the data with the regulatory authorities that have an authorisation to view the data - for example European data is only shared with European regulators. “Furthermore, our data centre is a standalone service which is dedicated to EMIR reporting for derivatives only,” he adds.
ECONOMIES OF SCALE
Macbeth believes the key attributes when choosing a trade repository should be the robustness of the technology used, proven track record and the ability to deliver economies of scale. He says: “DTCC benefited from the expertise and experience in other markets and as a result we continue to see high demand for our service, even after the go-live date. Moreover, our emphasis on safety and certainty is of particular relevance to asset managers because of their fiduciary responsibilities.”
Although DTCC began an awareness-raising campaign soon after mandatory trade reporting was announced, Macbeth says this intensified following the ESMA authorisation of trade repositories. It continues to work with the industry to raise awareness of reporting obligations, especially amongst non-financial counterparties, through direct workshops and other means.
As the reporting process will most likely require a period of fine-tuning Macbeth says that DTCC will continue to work with clients to make enhancements and further refine services so that its trade repository continues to effectively meet the reporting requirements of the wide universe of market participants that have selected their system. DTCC is also working to develop processes to standardise data formats, in cooperation with market participants, through direct liaison with its clients and via client working groups as well as through direct contact with regulators and Macbeth expects progress on standardisation will be made in the coming year.
He says: “The industry will undoubtedly go through a period of adjustment, given the scale of the undertaking and relative lack of data standardisation. We are fully committed to resolving any outstanding issues so that our global trade repository effectively and efficiently meets the reporting requirements of market participants who have signed onto our service in Europe.”
Steve French, Director of Product Strategy of Traiana in London says that the key issues with respect to the quality and capture of data are largely associated with three main areas, namely: the population of particular trade report fields as defined by ESMA, the level of support for confirmed trades and UTI sharing for OTC trades prior to trade submission to TRs.
French says: “The correct population of trade report fields will be resolved as the submitted data is analysed and as industry working groups start to reach consensus across their members an in conjunction with the regulator. The issue with respect to confirmations concerns at what stage each leg of a trade is confirmed and has to be reported, which is especially difficult when discussing trade lifecycle events. Once again, consensus will be achieved in the industry in the coming months. The final challenge is with respect to the exchange of UTIs between market participants. Given the multiple FX trading paradigms, trading platforms and confirmation processes – there has not been a single platform capable of sharing/matching UTIs between counterparts.”
To this end, Traiana has extended Harmony to support UTI management for direct trading relationships in addition to the original EB-PB give-up support put in place for CFTC reporting in 2013.
With reporting now live, trading firms will be looking to take steps to reduce the ongoing cost and administrative burden of reporting to trade repositories. According to French, the biggest administrative burden and ongoing cost for trading firms, where cost reduction can be applied, is in the aggregation and correct population of trade reports prior to their submission to a trade repository, where a firm is reporting directly and in the post reporting reconciliation required where a firm is relying on delegated reporting from their counterparts.
He adds: “Firms should look to solutions that help aggregate trading information and UTIs from their counterparts, simplify the reconciliation process across their trading relationships and provide support for the additional complexities associated with EMIR reporting to come – such as the reporting of valuation and collateral – and the introduction of other European initiatives.”
This is what Traiana is offering through its TR Connect service and French says Traiana is successfully helping firms reduce the time taken to assemble and reconcile reports both prior to and post trade submission to trade repositories.
Although it remains to be seen how reconciliation requirements will influence a buy-side firm’s choice of trade repository, French says Traiana has noticed that some counterparties offering delegated trade reporting services are not giving their clients a choice of which TR to report to. He says: “The client will have their trades reported to the TR dictated by the reporting party as they are already reporting their own trades there for other reporting jurisdictions e.g. CFTC.”
“We’re working with a number of firms who want to report to their chosen trade repository, which may be for a number of reasons including having an existing relationship, reporting under a different regulatory regime or based on a competitive analysis. We typically find in this case that firms want to see and perform trade reconciliations in real-time, which is where our counterparty matching service can serve them.”
Traiana has run a number of industry initiatives including running its own webinars, spoken on trade show panels and is compiling its own regulatory newsletter in order to increase the level of awareness over the coming months amongst non-financial counterparties about their new reporting obligations. “Given the level of confusion in the market with respect to obligations for different trading parties, we’re also holding joint events with the ESMA registered TRs so firms can ask questions of all the key industry players at the one event. We’re even introducing a discussion panel at the next event where firms can ask representatives from all of the TRs key outstanding industry questions,” French adds.
As more jurisdictions mandate trade reporting using different regulatory requirements with respect to single sided/dual sided reporting, valuations and collateral and trade identifiers French says there will be a greater the requirement for more complex solutions that are capable of satisfying all of a firm’s reporting requirements. Due to these complexities and the fact that banks have many client trading relationships he believes solutions based on a combination of a middleware working in conjunction with the TRs own messaging in order to allow all of a banks’ clients to be satisfied with respect to asset class, jurisdiction and TR support will win out.
Another registered trade repository, the European Trade Repository at CME Group, has built-in flexibility in terms of being able to receive data in all formats so it is up to customers how they want to send in the data – from comma separated data (i.e. an Excel file) to ‘ftp’ files. Data files have been received and recognised across all the asset classes and all the trade repositories are working together to exchange files.
Daniel Corrigan, Executive Director & Chief Executive Officer of European Trade Repository, CME Group, says: “Where there are discrepancies or missing fields we are able to spot and resolve it very quickly. So far there have been only a handful of such cases and once resolved the problem has not occurred again. We are constantly in conversation with the regulators and the other trade repositories to improve and streamline the process.”
In addition to this the European Trade Repository at CME also offers a Delegated Trade Reporting Service which aims to help CME Group customers be fully compliant by reporting the most accurate data direct from our exchanges and clearing houses on their behalf. This service is up and running at CME Group’s US and European exchanges and clearing houses for exchange-traded and over-the-counter markets.
Nicolas Boatwright, Managing Director of REGIS-TR, says that many of its customers say that the trade repository’s flexible participation models are a key differentiator. He says: “We support a fully flexible model, facilitating direct and indirect participation through different post-trading platforms, vendors, CCPs and market participants.”
In REGIS-TR, a reporting participant is counterparty to the trade it is reporting: any entity with a reporting obligation can become a reporting participant. They are able to accept delegation and report their counterparties’ side of the trade. A reporting third party is not legal counterpart to any of the trades it is reporting: EMIR allows the delegation of the reporting obligation to such third parties and any entity can play such a role either for same-group (internal activity) and/or on behalf of clients (external activity). They are able to report on behalf of as many LEIs as they wish. Non reporting entities are entities that have a membership of the trade repository to view trades that another entity has reported on their behalf (read only). These trades could have been sent by a third party or a reporting participant. They will be able to see all trades reported for their LEI. And finally, non-members are entities who have delegated their reporting to another entity and do not have a non-reporting access to view trades reported. These entities do not have a contractual relationship with REGIS-TR.
Says Boatwright: “Obviously, we continue to work very closely with ESMA and the NCAs, and our regulator’s portal has been available since the 14th February. A number of NCAs have requested access to date.”
The six trade repositories are also fully engaged with each other and have successfully agreed how to exchange information, reconciliation approaches, for example with regard to tolerances but given the nature of the implementation of EMIR, the level of market interpretation and different genesis of each of the TRs, it is not surprising that some teething problems exist with regard to differences in formats and standards.
Boatwright says: “Client feedback suggests that capturing the data may not be quite as easy an initially envisaged. An investment manager recently told us that they have to pull the information from four different platforms, consolidate and then send. Similarly, outsourcing to a third party may not resolve this issue either. For example, if the trading platforms or counterparts have an incomplete set of data then the client back-office would be required to complete that set. Of course, there are third parties who can assist, for example, treasury management system providers of dedicated reporting modules that are appended to the core applications.” In terms of the quality of the data, Boatwright says that differences will arise concerning the use of LEIs (or alternative identifier), UTIs and UPIs meaning it is important for participants to be completely aligned with their counterparties so as to avoid reconciliation breaks. Similarly, both parties to the trade will need to use the same UTI. It needs to be a completely unique global reference and counterparties will need to agree bilaterally how it will be allocated, who will generate and who will consume.
AUTOMATION TO CUT COSTS
Going forward, Boatwright believes that the real cost to customers will be in the ongoing administrative burden. Some customers may chose to delegate their reporting, with sell-side providers offering ‘free’ trade reporting on a tactical basis to some of their key customers. However, this is not always the most cost efficient solution either. He says: “For example, you can outsource the act of reporting, but regulators note that participants to the trade remain ultimately responsible for compliance with EMIR reporting requirements. Therefore, strictly speaking, you should be reconciling the information reported on your behalf to ensure its accuracy. Many participants take the view that if they are going to have to check the accuracy in any case and also if their provider offers the service under limited liability for failures/breaches, then they may as well report themselves.”
Whilst REGIS-TR supports multiple connectivity media, Boatwright says the trade repository encourages clients to get fully automated and provides solutions to fully support this, for example, the re-use of MT300 SWIFT foreign exchange confirmations. It is also working bilaterally with clients to help them fine tune their operations around reporting of different instrument types with a view to automating at the earliest opportunity.
More than anything, Boatwright says the key is for firms to select the TR which can best understand and meet their own particular requirements. Flexible participation options, connectivity and reporting options etc will all play a large part in helping them to reduce the administrative burden of compliance with EMIR, he says.
“An efficient intra-TR reconciliation process will be in place and customers should bear in mind that the chosen TR for a large sell-side participant may not be the most appropriate choice for them,” he adds.
Given REGIS-TR’s diverse client base, Boatwright says the repository has taken the view from the outset that it needs to offer a full suite of connectivity solutions, giving customers the widest choice possible to integrate their reporting requirements into their existing workflow, suited to their own volume and/or level of sophistication.
Boatwright says: “The different solutions we offer are already scaleable; a CSV file being used by a small corporate treasurer uses the same format as a big CCP like Eurex. Customers can instruct us using a range of connectivity options from Web Services SOAP API, SFTP, SWIFTNET and even leased lines upon request for exceptionally large bandwidth requirements.”
He adds that the robustness of a trade repository’s technology infrastructures and ability to cope with increased demands in the future is of vital importance as reporting delays could cause a participant to breach their EMIR obligations. To this end, REGIS-TR’s IT group undertakes real-time system performance monitoring and the system is easily scalable intra-day. As and when additional reporting requirements kick-in, then REGIS-TR will most likely undertake similar assessments. To date, despite large volumes, no system problems have been reported.
During 2013, executive representatives from REGIS-TR attended 80+ conferences, road shows and trade events across a number of different sectors and locations. Although a large number of NFCs should have already chosen their TR, anecdotal evidence surrounding the allocation of LEIs suggests that many still have not so continued engagement with the marketplace – FCs and NFCs – remains important to REGIS-TR. “Many of our smaller NFC customers leverage 3rd party solutions like Bloomberg, Traiana, Misys, SunGard etc and we fully support this for them,” adds Boatwright.
For Boatwright, the main focus has got to be about trying to make meeting the core requirements as painless as possible for customers - a client base that spans the entire EMIR net, from small corporates to CCPs or global securities houses. He anticipates further developments of the platform, for example to cater for more niche reporting requirements, greater data search functionality and more granular detail. “We would envisage enhanced MIS and analytical tools to help customers digest the data in a more palatable format,” he says.
“Furthermore, our third party reporting model has taken off well and we are looking at enhancing this further. Notably, in the corporate sector, one entity may report on behalf of all of its affiliates and we want to help facilitate further centralisation in the corporate community.”
In addition to the core services offered, REGIS-TR already supports a number of value-added products, including centralised collateral management and reconciliation services. Furthermore, with Clearstream’s Global Liquidity Hub, REGIS-TR is part of a full lifecycle solution for the derivative asset class. The “Lifecycle” initiative with Clearstream and Commerzbank, for example, offers clients a fully integrated end-to-end management service covering: trading, clearing, settlement, custody, advisory, valuation, collateral management and, of course, trade reporting.
For Iwona Sroka, CEO of Poland’s trade repository, KDPW, both ESMA and trade repositories are taking measures to facilitate the co-operation of all market institutions. Such measures include dissemination of knowledge, harmonisation of solutions, exchange of information in reconciliation, and analysing needs of market participants and supervisors.
She says: “The first and foremost issue is that the market requires clear guidelines. The period directly following the reporting start date will be the time of stabilisation, identification and resolution of problems by way of new guidelines and market solutions. A business analysis must be carried out at each time and decisions should be made to select a repository and its solutions. This is the basic and most important step.”
According to EMIR, the counterparties have the obligation to agree the details of a trade while trade repositories only support the process. Whatever the selected reporting option, reports should be correct and Sroka believes the best way forward is to opt for unilateral reporting. All trade repository operating rules, security solutions and procedures are subject to ESMA approval. According to Sroka this ensures that TRs approved by ESMA, such as KDPW-TR, offer the highest safety options. She adds: “We have a lot experience in maintaining data from the financial market and KDPW has operated without any technical problems for the past 20 years.” Future stricter requirements should be taken into consideration; however, she adds, these are always planned in consultation and advance notice given.
KDPW continues to be in communication with the local supervisor and the market, and has taken a range of measures to disseminate information on the reporting obligations, running a wide scale educational campaign in media as well as supporting different market organisations to organise joint seminars and conferences.
Sroka firmly believes that the first step facing the industry should focus on defining uniform reporting rules and imposing the obligation on the entire market. Only after this phase, can further details and enhancements be considered.
In addition to compliance with the reporting obligations as a CCP, KDPW-CCP has introduced a service for reporting details of derivative trades to the trade repository operated by KDPW at the request of clearing members. Reporting can be delegated by clearing members and, through them, by their clients and entities concluding derivative trades on request of clients (brokers). KDPW-CCP, in conjunction with KDPW, has developed a number of relevant guidelines.
One problem which Sroka believes may arise in the early phase of trade reporting is that entities with the reporting obligation do not have LEIs. She also believes that there is little awareness on the reporting obligations, especially amongst non-financial entities. Another issue that she believes may hinder the smooth transition to trade reporting is the lack of clear guidelines and the initial technical problems due to the large number of modifications there have been.
Despite the debate on the reporting of exchange-traded derivatives (ETD) and the request to extend the deadline for reporting by 12 months, the ETD reporting deadline has been aligned with the other asset classes. But while reporting works well for OTC trades there is a general consensus in the exchange-traded derivatives world that exposures are best captured at position level not transaction level, yet only transaction reporting has been mandated to date.
For ETD trades, most CCPs take transactions during the day, net them in the evening and then build a position, as it is the position element that defines the exposure. Owing to the lack of clarity, trade repositories, particularly REGIS-TR, have tried to shed some light in this murky area based on EACH, the Futures & Options Association (FOA) and other industry body guidance.
Whilst ESMA has only mandated reporting of transactions, REGIS-TR has requested its customers to also report positions, thereby helping to ensure that the downstream information reported to the NCAs will be meaningful. Further clarification on this issue is expected to come later in the year.