Derivatives trading focus : The cost of compliance : JWG Group

FIVE REASONS TO EXPECT BAD NEWS.

JWG Group explains why market participants should brace themselves.

The challenges of gaining clearer oversight of the financial system are not going unnoticed. We come back from summer holidays with five leading indicators that suggest we are on the brink of bad news. Bad news that is likely to spread far and wide.

Firstly, in a new report, the US Government Accountability Office (GAO) faulted the Financial Stability Oversight Council (FSOC) for failing to enact certain reforms that were recommended in a similar oversight report issued two years ago. “FSOC still lacks a comprehensive, systematic approach to identify emerging threats to financial stability,” wrote GAO staffer, Nicole Clowers.

The second big piece of news is that LEI (legal entity identifiers) registrations have tailed off to levels far below expectations this summer. Even though the new risk reporting regime is requiring ever more registrations, thanks to the bold move of the European Banking Authority (EBA) to mandate the LEI, the numbers of registered legal entities just aren’t there, and there are the statistics to support this.

The third newsflash comes from an HM Government report published this summer looking at the ‘Balance of Competences’ between the UK and the EU. In it, they cited JWG’s 2012 research conclusion: “EU financial services industry will spend 33.3bn on complying with regulation between 2012 and 2015”.

We note that the figure they cited was based on an optimistic set of assumptions about the clarity and timeliness of reporting rules. The actual number is likely to be far bigger, especially if reporting problems continue to persist. Regardless, they are clearly concerned by the cost of European regulation to UK financial services.

The fourth big story comes from research published by Rachel Wolcott, a UK based financial regulation correspondent. Wolcott argues that the US and European regulators have failed to enact suitably robust trade reporting standards and as a result global regulators are now seeking to regroup and address the data quality and collection problems related to OTC trade reporting.

Wolcott notes that a lack of clear standards for reporting data, together with insufficient IT spending by regulators, has been blamed for what is in fact a failure of OTC trade reporting. Ultimately arguing that If regulators do not develop more descriptive standards for regulatory reporting, particularly for OTC derivatives trade reporting, financial institutions may have to do it themselves.

PJ DiGiammarino

As part of the same report, JWG’s CEO, PJ Di Giammarino (above), has been offering his insight into these reporting issues. “Unless there’s a better rule-making culture that promotes collaboration between technical specialists in the investment firms, the problems will only get worse. We need more informed political decision-making and a practical industry dialogue on how we get to reporting standards that make sense. We can’t keep doing it piecemeal. To have a fragmented approach across OTC derivatives trade reporting, equities trading, risk and stress testing makes it difficult to make decisions about a fast-moving and complex system.”

The final news item? As reported at a conference in London during September, Germany is starting to get tough on reporting infractions. Rumours abound about the pharmaceutical CEOs that are facing fines of 500,000.

The bottom line is that the reporting problem is only just starting to make itself known. If you are one of the parties that can be held accountable for it, watch out!

© BestExecution 2014

 

 

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