With the reporting of derivatives trades one of the four key pillars within the G20’s market reforms, regulators will be keen to see their enforcement of reporting requirements produce some results.
National watchdogs may have cut the buy-side some slack during the first year of trade reporting, but now they are beginning to sharpen their teeth and punishments for failures could be on the horizon.
It’s been an eventful first year for trade reporting, the process didn’t go as smoothly as planned but major strides have been made.
Thomas Durif, head of transaction management and OTC derivative products, BNP Paribas Securities Services, summed it up well, saying: “Challenges ahead should not let us forget that reporting is a huge undertaking and the industry has come a long way in the last year.”
We asked market participants to comment on the future of trade reporting:
Richard Wilkinson, director, post-trade solutions, Contango Markets
“The regulatory forbearance that everybody is speaking about will probably last beyond the February anniversary, but from March or April 2015 the relevant national authorities might start to look at it with a more stringent eye. I don’t think anyone will get fined straight away but I think they will say the rates need to improve. They might even come back on the TRs and say they need to talk to each other more and add that unless they can reconcile among themselves, the regulators can’t go and fine the end customers when they haven’t done the reconciliation part.
So fines might be held in the balance for a while but it may well be the TRs that suffer first.
I think the regulators wouldn’t want to be seen as going after the end investors so they would want to go after the TRs or the banks, brokers and futures commission merchant community, on the basis that they have taken on this delegated reporting.
But you have to bear in mind, there are a lot of things coming down the pipeline next year with MiFID II, the Regulation on Energy Market Integrity and Transparency, the European Markets Infrastructure Regulation etc. and maybe the regulators will hold back a bit and say “everyone is running to stand still so maybe this leniency should continue”.”
Francis Cook, specialist in regulatory compliance, GFT
“ESMA is currently conducting a consultation on reporting, to be completed by February 2015 - this may lead to a revised set of technical standards. Let us hope the results will lead to clarification and standardisation around the reporting.
The ongoing question of what good or correct practise will still rumble on as firms look to separate how they report, from what they book and match, with what they confirm. The main concern will be the scope of change and the impact to the market. With all eyes on the results of the consultation and clearing mandates, the ultimate question will be: what is the cost of trading?”
Ian McLelland, DTCC
Ian McLelland, CEO, DTCC Derivatives Repository
“The end of the year was a good opportunity for firms to look back over their reporting in 2014 to determine whether they are using the reporting model best suited to their future needs, namely the direct versus delegated reporting model.
For many firms, reporting directly to a trade repository was initially the simpler, more practical solution. However, the mandatory changes we are seeing now and will likely continue seeing in the future mean that these direct reporting solutions will need continual upgrading. Additionally, firms are also now more accurately able to assess their reporting requirements, whether by low-volume upload using a web-based, manual spreadsheet or medium-high volume automated solutions. As a result, we envisage that some firms may decide that the direct reporting solution is not necessarily ideal.
With this in mind, firms may instead opt for delegated reporting where the buy-side firm’s dealer or a nominated third party reports both sides of the trade using one UTI so that a trade can be more easily paired and matched by a trade repository or between trade repositories. Here, compliance with the ‘level one validation’ process has been facilitated by the provider of the delegated reporting service. Furthermore, as EMIR becomes subject to further revisions in the coming years, buy-side firms can continue to look to their dealer or third party provider to facilitate the compliance of their reporting solution.
Reporting under EMIR continues to be a work in progress. Whichever reporting model a firm chooses, by acting now and ensuring long-term strategic reporting solutions are in place and matched to their business needs, firms can be better prepared to more cost effectively respond to future changes. “
Thomas Durif, BNP Paribas
Thomas Durif, head of transaction management and OTC derivative products, BNP Paribas Securities Services
“In the longer term, there are now 23 trade repositories worldwide, which means data is extremely fragmented. The Financial Stability Board said recently that a global trade repository was now needed, which will most probably come with its own set of challenges. It is also worth noting that cross-border issues were put in the agenda of the G20 Summit in Brisbane at the end of November. Progress has to be made on regulatory coordination in order to avoid gaps and inconsistencies.”
Steve French, director of product strategy, Traiana
“Looking forward, local regulators will turn their attention to the quality of data being reported by both parties, creating a need for the buy-side to reconcile all reported trades, whether submitted by themselves or by their counterparties on a delegated basis an essential requirement. As the scope and volume of reportable trades increases so do the complexities associated with reporting and reconciling those trades. This together with the introduction of additional directives e.g. MIFID II in 2017, is set to bring even more reporting challenges for the buy-side.”
To read the first two parts of the trade reporting series check out theTRADEnews.com.