Market participants needed to begin reporting derivatives trades from 12 February, but there are reports of firms still contacting third-parties for delegated reporting. What are the pros and cons of outsourcing?
What does the regulation say about delegated reporting?
In Europe, unlike in the US, both buy- and sell-side counterparties need to report derivatives trades to a trade repository (TR) under the European markets infrastructure regulation (EMIR). As a result, buy-side firms need to have a system in place to comply with the new rules. The European Securities and Markets Authority (ESMA) allows for market participants to pass on the task of reporting to a third-party, however. The sort of businesses offering delegated reporting vary from central counterparties for exchange-listed derivatives to a broker or vendor for OTC trades, for example. The regulator has no specific rules on how delegating reporting should be performed, although in its EMIR Q&A, ESMA said legal documentation is recommended. EMIR provisions should be respected, with data submitted in a timely and accurate manner – and most importantly the liability of any misreporting by third entities would still fall on the counterparty.
What are the benefits of delegating reporting?
A number of organisations are offering services for delegating reporting. One of the reasons a buy-side firm may go down this route is if they already use a centralised system for trade processing, for example, such as MarkitServ. Data required would be within the system and therefore easily passed on to a TR by Markit. Third parties are also offering to reconcile buy-side data to make sure what’s being sent is accurate and matches what the sell-side provides as well. And let’s not forget the unique trade identifier (UTI), which is required by TRs. Buy-side firms have been concerned about whether they would get the UTI from the sell-side in time to report. Using a third-party may make it easier to share the UTI between counterparties or simply construct it as well.
Why would a firm choose to report directly?
Delegated reporting may not work for everyone. Buy-siders with a large number of derivatives positions and relationships may find it complex to outsource. Buy-side firms would potentially have to contact all counterparties and draft a reporting agreement with each one. This could be a labourious process. This was outlined with the case of reporting of exchange-traded derivatives, which ESMA was hoping to postpone, but was turned down by the European Commission, there was little time to prepare. Buy-side firms were receiving delegated reporting agreements for central counterparties as late as December. Also, some firms quite simply may want to keep control of the reporting process because the liability ultimately falls on them.
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