Buy-side firms have come out in support of the Committee of European Securities Regulators’ (CESR) recommendation for the organisation of transaction and position reporting on OTC derivatives, under the caveat that the obligation to transaction report is attached to market makers and broker-dealers.
Firms and industry associations were responding to a consultation paper published by CESR on 19 July 2010. CESR, which is responsible for harmonising financial regulation across Europe, set out possible ways in which transaction reporting for OTC derivatives could occur and consulted on extending the scope of reporting obligations to financial instruments traded only on multilateral trading facilities (MTFs) and for OTC derivatives.
In its paper, the regulatory body asked for responses on three issues. Firstly it asked respondents for their preference of two proposed solutions to the organisation of transaction and position reporting. Buy-side response was overwhelmingly in favour of the second of the two, which was recommended by CESR.
Under this approach a new position reporting regime would be established, and transaction reporting would be run either through trade repositories (TRs) or directly to relevant authorities. UK industry body the Investment Management Association, noted that, “We see no need to restrict how firms are able to report, as long as they do report.”
The Alternative Investment Management Association which represents hedge fund interests disagreed stating that, “It is unclear how firms that choose to report directly to the competent authority (as currently required by MiFID) will get the information to the trade repository, which is intended to be a source for all national regulators, competent authorities and other relevant bodies. Duplicative reporting to competent authorities and the trade repositories is inefficient and should be avoided.” The industry body instead supported the option to establish a single regime for transaction and position reporting through trade repositories.
Asked on the second issue, whether they had “any other views on the possible ways to organise transaction and position reporting on OTC derivatives?” respondents agreed that, in the words of the European Fund and Asset Management Association, “The obligation to transaction report, either under MiFID or to the trade repository, should attach to the market maker or broker-dealer; it should only attach to the end user if there is no market maker or broker-dealer involved.”
The German fund management association Bundesverband Investment and Asset Management, added that, “The most important aim is to achieve a single (MiFID-compatible) reporting standard and message formats between the reporting parties, TRs, central counterparties, regulators and other service providers (e.g. collateral management agents). A reduction in the number of required report receiving parties is also needed. Otherwise cost and complexity of the system may become unmanageable.”
CESR was also consulting on whether to extend the scope of transaction reporting obligations to financial instruments that are admitted to trading only on MTFs and to OTC derivatives. On this point the responses were generally positive. The French investment management industry body Association Française de la Gestion Financière agreed to the extension for instruments reported only on MTFs but added that, “At first, only a limited number of OTC instruments should be in the scope. The system could later be extended to other OTC derivatives” in order to avoid excessive costs. It also advised excluding basket and index-based OTC derivatives from its scope.
The responses will be used by CESR to supply the EC with information as part of its review of MiFID. This is supplementary to technical advice provided by CESR to the review at the end of July 2010. The results of the MiFID review are expected in Q1 2011.