Delegating reporting the way to go – The TRADE poll

Nearly 70% of respondents to February poll believe buy-side firms should outsource derivatives trading obligations under the European market infrastructure regulation.

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Nearly 70% of respondents to February poll believe buy-side firms should outsource derivatives trading obligations under the European market infrastructure regulation (EMIR).

The poll found 68% of respondents support delegating reporting, while 32% voted against.

Market participants, both buy- and sell-side firms, have been required to report derivatives trades to one of six trade repositories since 12 February.  Under EMIR, institutional investors always maintain the responsibility to report, but can outsource reporting to brokers or third parties.

Mark Husler, CEO of trade repository UnaVista, a London Stock Exchange company, said it was up to individual firms to set up their own business model, with no right or wrong answer on how to report.

“There are some organisations that do like to control reporting in-house. They feel it reduces their regulatory risk and I think that’s a growing trend.”

However, at the same time, Husler said: “Sell-side firms have been very active in exploring ways of using technology for delegating reporting”.

David Broadway, senior technical advisor at UK buy-side trade body the Investment Management Association, said he wasn’t surprised about poll results, as the majority of the investment managers are delegating at least some reporting.

Broadway said on one end of the scale there were a “very small” number of firms not delegating anything, and on the other side of the scale there was a slightly larger number of firms delegating everything.

“In the middle, you’ve got a big block that are reporting some trades and delegating others. The most common split would be between OTC derivatives and exchange traded derivatives.” 

He said firms that weren’t delegating reporting had made an early decision to do so as they didn’t want to risk brokers not being able to report on their behalf.

“A lot of sell-side firms left it quite late. It was only in December and January that brokers started coming through and confirming they would report for buy-side firms. Had that come through in August or September, I think far more investment managers would have delegated." 

Key drivers

Broadway said there were three main reasons buy-side firms choose to delegate reporting, with the first being savings from not having to maintain reporting mechanisms.

“Brokers already have systems in place because of Dodd-Frank in the US. Investment managers would have to build infrastructures from scratch, and will need to maintain those going forward.”

Passing on the work to brokers also avoids challenges with unique trade identifiers, which is one of 85 data entries required for reporting, and how that’s communicated between counterparties, Broadway said. 

“The other key benefit of delegating is that with two parties reporting there is a lack of clarity around some of the reporting fields and what goes where.

“What may happen is both parties will put the same data in different places, for example. And so when the matching process begins, firms are going to have to do a lot work to resolve the breaks.”

Broadway said regardless of whether a buy-side firms decides to delegate or not, there needed to be a process in place to oversee what is being reported on their behalf.