The changing face of derivatives reporting

Chris Childs, managing director, head of repository and derivatives services at DTCC, and CEO and president of DTCC Deriv/SERV, tells The TRADE about the industry’s need for a new approach to derivatives reporting.

Chris Childs, managing director, head of repository and derivatives services at DTCC, and CEO and president of DTCC Deriv/SERV

Among the forces that have shaped the global financial industry over the last decade – including relentless cost-cutting pressures and rapid technological advances – arguably one of the most consequential has been the proliferation and continual updating of regulatory mandates. In particular, reporting mandates for derivatives transactions resulting from the 2008 financial crisis have presented unique challenges for firms due to their complexity and jurisdictional discrepancies.

The expansion and ongoing evolution of this regulatory landscape has required financial firms, large and small, on the sell-side and buy-side along with their service providers, to dedicate tremendous human and financial resources to compliance. It has also challenged industry solutions designed to assist firms in carrying out their derivatives reporting obligations to adapt and update their features and functionality to keep pace with the changes. 

The TRADE recently spoke to Chris Childs, managing director, head of repository and derivatives services at DTCC, and CEO and president of DTCC Deriv/SERV, about the industry’s need for a new approach to derivatives reporting that reduces the cost and operational burdens associated with regulatory reporting compliance for reporting firms. Childs discusses what DTCC has done to meet this need, with the launch of its DTCC Report Hub® service, a multi-function pre- and post-reporting service platform that complements trade reporting done via its Global Trade Repository service (GTR).

Transaction reporting has evolved over the past decade in response to new rules and regulations promulgated in jurisdictions around the world. Describe the trade reporting solutions DTCC has brought to market.

Chris Childs: DTCC staked out its industry leadership early on in this area by building the industry’s first trade repository (TR) service.

The surge of global legislative and regulatory activity triggered by the 2008 financial crisis – and guided by the Group of 20 nations’ (G20’s) recommendations on measures to reduce market risk – included directives that derivatives transactions be reported to repositories accessible to regulators.

The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the roll out of the Commodity Futures Trading Commission’s (CFTC’s) reporting rules in the US in addition to the European Union’s (EU’s) passage of its European Market Infrastructure Regulation (EMIR) created the need for global reporting solutions.

Having established the Trade Information Warehouse, the industry’s first infrastructure for record retention and asset servicing of cleared and bilateral credit derivatives, several years earlier, DTCC was well-positioned to continue steering the industry’s efforts to build out a TR infrastructure.

DTCC now operates licensed/registered TRs that serve derivatives reporting requirements in the US, Canada, UK, EU, Switzerland, Australia, Singapore and Japan and an agent service to facilitate reporting to the Hong Kong Monetary Authority.

Trade reporting was later extended to securities financing when the European Securities and Markets Authority (ESMA) in 2016 rolled out the Securities Financing Transactions Regulation (SFTR) for transactions conducted in the EU and UK, with reporting by firms starting in 2020.

DTCC’s broad experience with respect to reporting across jurisdictions and over both derivatives trade reporting and SFTR makes DTCC uniquely situated to understand reporting issues.  DTCC recognised the market need for firms to utilise a single TR for derivatives and SFT reporting in a given jurisdiction. To meet this need, we expanded the functionality of our UK/EU TRs to SFT and in 2020 secured authorisation from ESMA and the FCA to accommodate SFTR reporting.

How has Brexit complicated the regulatory landscape?

Childs: Since it took effect at the end of 2019, Brexit has required the UK’s Financial Conduct Authority (FCA) and the EU’s ESMA to establish separate trade reporting regimes in each jurisdiction.

This bifurcation has created a complex matrix of reporting mandates for the firms engaged in UK and EU transactions. The FCA’s regulatory ambit now includes UK-EMIR, MiFID II and UK-SFTR, while ESMA’s encompasses EU-EMIR, MiFID II, EU-SFTR and REMIT (Energy Market Integrity and Transparency).

Accordingly, DTCC established the Dublin-based DTCC Data Repository (Ireland) Plc (DDRIE) to serve as the registered TR to support the EU 27 countries. Our London-based DTCC Derivatives Repository Plc (DDRL) is now DTCC’s registered TR for the UK, operating under FCA supervision.

Beyond keeping pace with new and evolving trade reporting regulations, what have been key priorities for firms in managing compliance?

Childs: Our GTR clients have continually told us they want simplified reporting functionality. So, in 2017 we undertook a multi-year re-engineering project known as GTR 2.0. This extensive platform re-architecture was dedicated to improving the client experience for GTR users through the addition of user-friendly, self-service capabilities through the GTR user portal, a simplified, intuitive interface and expanded asset class coverage.

In addition, the redesigned GTR user portal provides a common interface across all regions, making it easy for clients to view their trade data cross-jurisdictionally. The user-friendly, self-service portal gives clients direct electronic access to their GTR data, enhances their ability to query the data and offers analytics features that deliver valuable insights on their trades.

What was the turning point in terms of market needs that led DTCC to create DTCC Report Hub?

Childs: As transaction reporting regulations have been introduced and repeatedly expanded over the past decade, they have taxed firms’ internal operations, processes, governance and infrastructure. The lack of harmonised derivatives rules across jurisdictions has further complicated firms’ compliance challenges. Now major jurisdictions – starting with ESMA and the CFTC – are embarking on a round of rules rewrites, which will in turn require more industry spend to adapt their reporting protocols and infrastructure. 

The market’s need for a suite of pre- and post-reporting services that can help alleviate the burden on in-house technology and staff tasked with building and supporting complex systems to meet the periodically changing regulatory requirements of both derivatives and SFT reporting mandates – as well as increase operational efficiencies and drive down costs – first became obvious a few years ago.

If we could give clients a single platform to perform all their pre- and post-reporting reporting tasks, not only across asset classes but also across regulatory regimes, it would be a game-changer.

What services does DTCC Report Hub offer?

Childs: We designed DTCC Report Hub to address the numerous pre- and post-reporting tasks that can help firms reduce regulatory compliance risk and cost.  At its launch in early 2020, DTCC Report Hub services were limited to SFTR, in order to ease firms’ efforts to manage their pre- and post-reporting requirements under this new regulation.

By year-end, we had expanded coverage to derivatives reporting, a move facilitated by DTCC’s acquisition in December of the Compliance Management Reporting System platform (CMRS) from Publicis Sapient. Integration of CMRS into DTCC Report Hub will transform the pre- and post-reporting landscape for firms by delivering a unified pre- and post-reporting platform at a critical time, just as regulators are preparing to enact more changes and additions to reporting rules for derivatives. With the addition of CMRS’ capabilities, DTCC Report Hub enables firms to consolidate their pre- and post- reporting activities for multiple jurisdictions – US, UK, Europe, Canada, Israel, Singapore, Australia and Hong Kong. This breadth of coverage can help firms maximise their operational efficiencies and compliance-risk mitigation, reduce costs and free up staff for other priorities.

What kinds of pre- and post-reporting tasks are involved?

Childs: At the pre-reporting end of the trade reporting lifecycle, the DTCC Report Hub pre-reporting suite of services streamline the workflows required to prepare trade data for submission to a TR or Approved Reporting Mechanism (ARM). These services include data normalisation, data enrichment, jurisdictional eligibility analysis and advanced exception management and reprocessing. Increasingly we are seeing regulators stipulate the format of inbound messages using, for example, ISO 20022. The DTCC Report Hub data normalisation service enables firms to provide data in multiple forms and translate it into the format required by the regulator. DTCC Report Hub pre-reporting services also include a customisable rules engine that allows firms to configure bespoke rules for pre-reporting validations with format checks, mandatory checks and conditional checks.

Many buy-side firms are choosing to delegate their trade submissions to another party, and DTCC Report Hub has a delegated reporting feature to facilitate such submissions to an applicable TR or ARM. The feature facilitates a delegated trade submission on behalf of a reporting counterparty once they have established the applicable permissions at the receiving TR or ARM. Where a DTCC Report Hub user has delegated its reporting obligation for certain trades to another firm, DTCC Report Hub will identify and automatically suppress such trades prior to their submission to a TR or ARM.

DTCC Report Hub interfaces with TRs and ARMs to facilitate trade submissions. But once data is submitted, additional work needs to be performed to manage the trade data. DTCC Report Hub’s post-reporting reconciliation module allows users to reconcile the data held in their internal systems against end-of-day reports provided by TRs/ARMs. This process supports checks against counterparty-submitted data to help firms meet applicable regime specific reconciliation requirements. The DTCC Report Hub data insights module automatically generates trade-details dashboards and submissions monitoring to support extensive data analysis and provide users with insights into their data.

As a comprehensive pre- and post-reporting solution, DTCC Report Hub gives firms the most robust capabilities available to meet current and future transaction reporting challenges. Firms can utilise the entire suite or choose only those modules they need.

Does DTCC offer any other support around trade reporting?

Childs: DTCC Report Hub gives firms a powerful suite of pre- and post-reporting services that can help alleviate burdens on in-house staff, increase operational efficiencies and reduce costs. Nevertheless, firms must continue to address internal operations and technology challenges that affect their ability to remain competitive and stay abreast of evolving regulatory requirements. In some cases, outdated infrastructure is imposing unneeded costs and slowing key processes. Firms that have repeatedly modified their infrastructure in response to new and revised mandates may need a top-to-bottom infrastructure overhaul.

In other cases, firms may need help identifying and undertaking discrete projects that can yield large benefits to their trade reporting activities. Such projects include simplifying their data sets, upgrading the sourcing of their data elements related to collateral and unique identifiers, and creating new or upgrading existing performance and data-quality monitoring systems.

Whether the needs are sweeping or project specific, DTCC can provide assistance through DTCC Consulting Services. Firms can engage DTCC Consulting Services to help them spot and pursue opportunities to tackle large-scale upgrades to systems, processes, controls and governance, or carry out small-scale improvement programs. DTCC Consulting teams can also undertake strategic evaluations with follow-up tasks to be implemented by the firms themselves.

As the operational complexities and compliance costs of global trade reporting promise to continue to weigh heavily on the financial services industry, firms are seeking the most efficient, cost-effective means of meeting their regulatory obligations. With DTCC Report Hub and GTR, along with the option to access strategic advisory services from DTCC experts, DTCC can deliver the solutions they need.