Asset managers' reliance on advice from third-party vendors and clearing brokers as they prepare for new swaps reporting and trading regimes could lead to significant compliance delays, an expert has warned.
US asset mangers will begin reporting OTC derivatives trades to swap data repositories on 10 June under Title VII of the Dodd-Frank Act. But, many firms risk waiting too long to prepare systems, or moving too quickly in setting up trading and reporting arrangements, before it becomes clear which platforms will attract liquidity and thus which data repositories they should report to.
Zohar Hod, global head of sales at US risk management and market data services firm SuperDerivatives, believes the delayed reporting deadlines, combined with the wait for details on swap execution facilities (SEFs), are major factors affecting buy-side preparation for the new era of swaps regulation.
"Asset managers are falling into two groups: the larger firms that are advanced with setting up systems with counterparts for clearing and trading swaps under the new rules, and the vast majority of smaller asset managers waiting to see which SEFs attract the most liquidity," Zohar told theTRADEnews.com.
The absence of clarity has created a bottleneck for buy-side firms, already stretched with the breadth of regulatory-driven systems overhaul.
"Most buy-side firms are forced to rely on advice from their clearing brokers and vendors to decide how to set up their swaps clearing processes and there is a very real possibility this will lead to a rush of asset managers finalising their IT and connectivity arrangements when reporting and clearing deadlines hit," he said.
Entities that are not major swaps participants or swap dealers - including most buy-side firms - must report trades in which they are counterparty from 10 April. As of 10 June, buy-side firms will have to centrally clear specified CDX and iTraxx credit derivatives, as well as dollar-, euro-, sterling- or yen- denominated standard interest rate derivatives.
In addition to the June deadline, asset managers on both sides of the Atlantic are increasingly wary of the European market infrastructure regulation (EMIR), which will level greater reporting requirements on buy-side firms.
Although details of EMIR are still being finalised, its mandatory clearing deadline is expected to fall in mid-2014, although reporting requirements will begin from September.
Reporting requirements are a core difference between EMIR and Dodd-Frank. EMIR will require market participants to report swaps and listed derivatives trades in addition to submitting collateral reports. Dodd-Frank only requires reporting of swaps trades. Unlike EMIR, Dodd-Frank allows swap dealers to report on behalf of their buy-side clients.
According to Arun Karur, vice president for consultancy and post-trade services firm Sapient Global Markets, EMIR's broader reporting requirements have forced asset managers to focus their attention away from Dodd-Frank.
"Many buy-side firms are realising the reporting requirement of EMIR will be significant and markedly different from Dodd-Frank requirements," he said. "Firms will need to develop automated solutions to report trades and will not be able to rely on their dealers as can be done under Dodd-Frank."