Buy-side firms are facing increasing pressure to start complying with new trade confirmation rules for OTC derivatives, as regulators look set to take a harsher stance on those failing to meet new requirements.
Both US and European regulators have enforced rules around trade documentation for non-cleared OTC derivatives with a focus on timeliness and recordkeeping.
The major change for the buy-side has been the timeframe. Trades were previously subject to a T+30 obligation, however new rules now mandate trades are confirmed on T+1.
Recognising the significant change in time, regulators allowed firms a phase-in period to adapt to the new changes, though industry experts now believe the watchdogs will start clamping down on those not adhering the new rules.
“The regulators have been cognisant of the fact that the new regulations are a huge change for the industry, and as a result they have been willing to give firms time to improve their processes despite the fact they are not meeting the new targets,” said Nick Fry, global markets director, Sapient.
“There is a growing feeling in the industry now though that the regulators will start heavily focusing on how close firms are to complying and comparing firms versus their peers with regards to these targets. If firms are considered behind the curve there is a fear the regulators will start focusing their attention on these firms and make an example of them.”
Part of the reason the grace period was granted to buy-side firms over the last year was due to other, and more stringent, regulations coming into force and requiring vast amounts of time and resources to meet.
The main driver of this was trade reporting requirements which took effect in February, before additional rules added to the complexity in August.
Now those rules are in full-flow, buy-side firms are turning their attention to meeting the trade confirmation rules.
“If you buy a house, for example, you sign up to the legal terms and conditions before you make that transaction, so I do think the drive to remove downstream legal and operational risk makes sense from the regulator’s point of view,” added Fry. “The problem is the market has not worked that way in the past for most OTC transactions and therefore it is not currently set up to achieve T+1 compliance. As a result there are real fundamental changes on their way.”
“What we are seeing now is definitely an uptick in movement in this space, people are looking at ways they can improve the process.”
In meeting the requirements, firms are beginning to move the process to pre-trade, as to perform the obligation T+1 is proving to be difficult.
Fry added that the process is also moving away from the back-office, as the people involved in the drafting and negotiations are sitting with the sales peoples and traders.