Post-trade : Trade reporting : Heather McKenzie

Getting on page.

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Heather McKenzie canvasses the trade reporting scene.

The G20’s drive to subject derivatives markets to greater regulation took another step forward in Europe on 12 February when mandatory derivatives trade reporting under the European Market Infrastructure Regulation (EMIR) came into effect. However, there is still some way to go before the G20’s vision for safer and more transparent derivatives trading is fully bedded down.

To date six trade repositories (TRs) have been approved for EMIR reporting by the European Securities and Markets Authority (ESMA): UnaVista, the Depository Trust & Clearing Corp (DTCC), Krajowy Depozyt Papierów Wartosciowych (KDPW), Regis-TR, ICE Trade Vault and CME Trade Repository. Under EMIR, all counterparties to any derivative trade must report their trades to a TR. Exchange traded and OTC derivatives were reportable from 12 February 2014, as well as all trades dating back to August 2012.

The first registrations of TRs began on 14 November 2013, only 90 days before the reporting deadline. The data gathered by the TRs will enable regulators to identify and to reduce the risks associated with derivatives markets.

Be24_DTCC_SandyBroderickDTCC’s UK-based subsidiary, DTCC Derivatives Repository, has been processing 40-50 applications from corporates per day, says Sandy Broderick, chief executive of DTCC Deriv/SERV. “Most of the large firms are already signed up to the repository and are reporting, but we expect there are still some organisations that have not yet addressed their reporting obligations.”

Many of the processes for reporting have not been embedded in the architecture of firms – even sellside firms that have been reporting for years, he adds. Much of the early work to get trades into the repository for reporting has been manual. “This isn’t really a surprise as it can take firms a couple of years to integrate their systems and I think this will be happening for the next year or so.”

DTCC’s service offers a single interface for global regulatory reporting via its Global Trade Repository (GTR). All asset classes are supported for both over the counter (OTC) and exchange traded derivatives (ETD) and trade submissions can be accepted directly from firms or through a third party services provider. DTCC says by building reporting solutions to a single hub firms can reduce their cost burden as data can be disseminated to all appropriate regulatory authorities from the GTR. The service is being offered as an “at-cost” model, says Broderick.

Be24_KDPW_IwonaSrokaKDPW, the central securities depository (CSD) of Poland, was established 20 years ago. Its trade repository is “yet another step in building the position of a provider of comprehensive depository, settlement, clearing and value added services to market participants”, says Iwona Sroka, chief executive of KDPW.

Sroka believes a “competitive pricing policy” and rigorous security standards are important features of a TR. “What is crucial to such entities is the security of collected and stored data on instruments and trade counterparties,” she says. “KDPW has established secure and reliable channels of communication with financial institutions. Another advantage of the repository, which is part of KDPW, is its business continuity plan: procedures triggered in case of unexpected developments, including a back-up data centre etc., which guarantee the security of stored information.”

REGIS-TR is jointly operated by Spain’s CSD Iberclear and international CSD Clearstream. As part of REGIS-TR’s business proposition, customers will be able to report as required under EMIR, as well as complying with requirements stemming from other regulations such as the Market in Financial Instruments Directive (MiFID) and the regulation on wholesale energy market integrity and transparency (Remit).

In addition to its core reporting and reconciliation service, REGIS-TR will deliver a range of value-added services, such as reconciliation, links to exposure management solutions and third-country domestic solutions. For example, the venture is offering a currency derivatives solution from Brussels-based financial messaging co-operative SWIFT. Under the arrangement, REGIS-TR accepts submission of FX derivatives trade reports, using a standard SWIFT FIN message, enabling firms to reuse their SWIFT connectivity and removing the need to product separate reports for trade submission.

The London Stock Exchange Group’s repository, UnaVista, operates as a European Approved Reporting Mechanism under MIFID for all asset classes and markets. By becoming a TR for all asset classes across all venues, the LSE says customers will need to connect only once to meet both their EMIR and MIFID reporting requirements.

Be24_Unavista_MarkHusler“UnaVista was built as a complex reconciliation and matching system for the post-trade area and our services have evolved in line with regulatory changes over the past five years,” says Mark Husler, chief executive of UnaVista and global head of product management at LSEG. “All of our services and customer base are focused on post-trade confirmation, reconciliation and regulatory reporting.” UnaVista is the largest approved reporting mechanism in Europe for MIFID transaction reporting, processing about 1.5 billion trades per year.

Husler says the majority of exceptions in the post-trade environment are linked to issues with reference data, but that securities data such as International Securities Identification Numbers (ISINs) or counterparty data such as legal entity identifiers (LEIs). UnaVista not only provides reference data services, but is also a local operating unit for providing global LEI codes to clients to assist them in reducing exceptions.

ICE Trade Vault Europe has been approved for the reporting of swaps and futures trade data in the commodities, credit, interest rate and equity derivatives asset classes. ICE already operates a Trade Vault in the US market, which since its inception in June 2012 has accepted over 17 million trades. Through the ICE trading platform and clearing houses, as well as ICE eConfirm, the company’s electronic confirmation system, which will act as the front end application for counterparties to submit data to the TR, ICE simplifies work flows and trade data reporting requirements for market participants.

Be24_ICE_BruceTupper“There are differences between the US requirements for trade reporting and those for Europe,” says Bruce Tupper, president, ICE Trade Vault. “For Europe we created a new system for reporting, rather than trying to take our existing system and making it fit.”

Tupper says ICE eConfirm is a differentiating factor, particularly for commodities reporting. “Large financial institutions and energy companies have taken a proactive approach to prepare for EMIR reporting; many of these organisations went through a similar process in the US. However, for many European-based clients this level of reporting is new and it is a big change to their operational processes.”

ICE considers the operation of a repository to be a vital part of its overall offering, says Tupper. “We want to ensure customers who trade and clear through ICE do not experience reporting inconsistencies of their transactions and positions. It fits with our offering as a network of global exchanges and clearing houses to provide trade reporting services and we are taking a holistic approach to execution, clearing and repository services.”

CME European Trade Repository (CME ETR) has been approved to provide a multi-asset class reporting solution for cleared and bilaterally settled interest rates, credit, foreign exchange, commodities and equity derivatives transactions. A real-time system, once a trade is reported it is EMIR compliant and immediately reflected in the user interface.

Challenges ahead

All of the TRs Best Execution spoke to were focused very much on the reporting itself. The next steps, which include collateral and exposure reporting, are about six months away. Issues remain, however. Anyone trading in Europe or with a counterparty in Europe needs to have an LEI and each counterparty to a trade has to report using the same transaction identifier, or UTI. The issue of who creates UTIs has not yet been resolved and in the meantime many industry bodies have agreed on an interim UTI taxonomy. DTCC’s Broderick says there are now 20 million open positions based on this taxonomy. Because the UTI is key for the data itself, there is much work to be done to change from the interim taxonomy to the new one, he says.

As UnaVista’s Husler points up, the EMIR reporting regime is new and very complex. “Many of the early issues regarding LEIs and UTIs will disappear as the industry harmonises around ESMA’s requirements. An LEI is a mandatory requirement under EMIR and is likely to be extended to other regulations. I would strongly recommend that firms get the LEI request process under way if they haven’t already. We began issuing LEIs in August 2013 and have received around 19,000 requests to date; this is a significant shortfall on the hundreds of thousands that will have to be issued.”

KDPW’s Sroka also highlights that at present each jurisdiction in Europe has established its own TR requirements, and in some cases there are multiple TRs for the same asset class. As a result, industry participants need to build connectivity to various TRs according to their business models and preferences. For example, although a firm may prefer reporting all its transactions to a certain repository, a CCP may require its cleared transactions be reported to a different one. “Market participants with global footprints must also report to a TR designated by local regulators, each with specific infrastructure and reporting criteria. The situation is further complicated for market participants trading across multiple asset classes.”

DTCC’s Broderick also warns of issues regarding collateral reporting. “Going forward there are issues that need to be resolved, such as how collateral will be reported. To get the numbers firms will have to bundle trades together but what if trades are comingled? Firms will be required to lump together OTC and ETD trades to create the right collateral numbers and to extrapolate from them what is meaningful. There will be work to be done by industry groups to establish data quality and presentation standards that will deliver meaningful data.”

© BestExecution 2014

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