Market participants are likely to experience further inconsistency and confusion in derivatives reporting after the European Securities and Markets Authority (ESMA) released additional guidance the evening before deadline.
ESMA updated its European market infrastructure regulation (EMIR) Q&A on 11 February – the day before the buy-side was required to report OTC and listed derivatives to trade repositories (TRs) for the first time – providing further details a number of topics, including unique trade identifiers (UTIs) and unique product identifiers (UPI).
Dario Crispini, lead consultant at Kaizen Reporting, which has been working with market participants and third-party providers, said ESMA should have synchronised changes to reporting requirements and provided more certainty on implementation dates.
“The change to UPIs is big and that was only released on Tuesday – a day before reporting was set to commence,” Crispini said. “Obviously they don’t expect firms to comply with that right away, but it just creates discrepancies across the industry on how they are reporting.”
Crispini said introducing late changes, such as ESMA’s guidance of exchange-traded derivatives released in late December, has made it hard for TRs to do testing with market participants in a timely manner.
Reemt Seibel, a spokesman for ESMA, today said this week’s Q&A was issued quickly because the regulator believed it would be helpful to clarify issues immediately.
“ESMA however appreciates that firms will need some time to consider the additional guidance related to trade reporting,” he said.
ESMA’s latest Q&A provides clarity on how to identify a derivatives contract in the absence of a Europe-endorsed UPI taxonomy, an international securities identification number or alternative instrument identifier.
According to ESMA, derivatives classes should be identified by either commodities, credit, foreign exchange, equity, interest rate, or other in field 2 of reported common data, while the type of derivative by contract for different, forward rate agreement, forwards, futures, options, swaps and other in field 3.
“In case of derivative contracts not falling into a specific derivative class or type, the report shall be made on the basis of the derivative class or derivative type that the counterparties agree the derivative contract most closely resembles,” ESMA said.
“In the absence of UPI taxonomy endorsed in Europe, no other taxonomy, classification or code should be used to populate these fields.”
As for UTIs, ESMA suggested four methods to determine how to create the identifier and gave an order of preference for UTI generation. UTIs for centrally executed and cleared trades could be generated by execution venues or at point of clearing by the CCP, for example, while UTIs for centrally confirmed but not cleared trades could be created at the point of confirmation.
It’s unknown whether ESMA will endorse a UTI framework in the future, but theTRADEnews.com understands the regulator has been in talks with the International Swaps and Derivatives Association, which published guidelines on the construction of UTIs last year.
Testing times
Reporting regulation has been in effect since Wednesday, but Crispini said today (14 February) would give an indication of how the market has handled the new requirements, as most firms report on a T+1 basis.
Crispini said he hadn’t heard any “horror stories” yet, but claims there were hiccups when processing old trades over the past month, also required under EMIR.
“Exchanging the trade identifier is harder for historic trades,” he said. “Now it’s really about whether they can handle the daily volumes at the end of the day.”
Poland’s Central Securities Depository of Poland (KDPW), REGIS-TR, a joint venture by Iberclear and Clearstream, the London Stock Exchange’s UnaVista, ICE Trade Vault Europe, the CME Trade Repository and the Depository Trust and Clearing Corporation’s Derivatives Repository are the ESMA-approved TRs.
On the first day of reporting, ICE said it processed around 4.5 million trades, relating to more than 300 market participants. While UnaVista, which went live before 12 February, has reported more than 17 million trades on behalf of 2,800 companies.