02 October 2014

David Field

David Field - Rule Financial

8 | posts 23,026 | views 0 | comments

FX trade reporting: What a difference a day makes

29 January 2014  |  1856 views  |  0

With the EMIR trade reporting deadline only two weeks away, you might be forgiven for expecting that there is now absolute clarity on which trades are covered by the mandate, and that all participants have prepared their trade reporting solutions accordingly. However, this simply isn’t the case. Although most of the uncertainty regarding the types of trade impacted by the mandate has been beaten out of the system (for example, by the unexpected but absolute inclusion of exchange traded derivatives in the 12th February deadline), there still remains considerable confusion around the reporting of foreign exchange (FX) transactions.

Both Dodd-Frank in North America, and EMIR in Europe require that all derivatives transactions are reported to an authorised repository (a trade repository under EMIR, and a swaps data repository under Dodd-Frank). As such, both regulators have confirmed that FX forwards fall within the scope of the mandate, whilst FX spot transactions are exempt. However, differences in the classification of what constitutes a ‘spot’ and a ‘forward’ transaction in North America and in Europe means that figuring out which trades you will need to report is far from straightforward. 

FX trades that settle within two days of the trade being conducted are generally classified as ‘spot’ transactions, with the notable exception of North America, where FX spot trades can take up to three days to settle. FX trades that take longer to settle than the accepted regional term for a spot transaction are classified as forwards. The 24 hour difference in the classification of spot transactions therefore has a huge impact on the trade reporting requirements of firms, as both Dodd-Frank and EMIR require that forwards are reported. Essentially, depending on where you and you counterparty are domiciled, your firm may or may not need to report trades that settle on a T+3 basis.

The Commodity Futures Trading Commission (CFTC) and the European Securities Market Association (ESMA) have done little to reconcile their conflicting rules, and it’s looking extremely unlikely that they will do so ahead of the 12th February deadline. In all likelihood, when the deadline hits, the trade repositories will be bombarded by a number of unreconciled and needlessly reported trades. This in turn will create a large volume of system ‘breaks’ and will lead to many a sleepless night for operational managers, who will likely bear the brunt of the chaos.

Despite being far from ideal, the FX trade reporting conundrum will likely work itself out over time. The only real losers in this scenario will be the operations managers who will need to wade through and reconcile seemingly ceaseless amounts of system breaks. The truly alarming thing here is that mandated central clearing, which is much more complex and will impact businesses on a far more fundamental level than the trade reporting requirement, is fast approaching. If ESMA and the CFTC have not resolved the confusion surrounding the definition of FX spot transactions (and the subsequent requirement to clear or not) before mandatory clearing comes into force, then the impact on trading desks could be truly crippling.

 

TagsTrade executionRisk & regulation

Comments: (0)

Comment on this story (membership required)
Log in to receive notifications when someone posts a comment

Latest posts from David

Call in the plumbers

14 March 2014  |  1327 views  |  0  |  Recommends 0 TagsRisk & regulationPost-trade & ops

FX trade reporting: What a difference a day makes

29 January 2014  |  1856 views  |  0  |  Recommends 1 TagsTrade executionRisk & regulation

Buyside collateral outsourcing: Running out of time?

30 October 2013  |  1787 views  |  0  |  Recommends 0 TagsRisk & regulationPost-trade & ops

Clear on-board?

04 September 2013  |  3277 views  |  0  |  Recommends 1 TagsRisk & regulationRisk & regulation

OTC clearing: show me the money

19 December 2011  |  3597 views  |  0  |  Recommends 0 TagsRisk & regulationWholesale banking
name

David Field

job title

Executive Director

company name

Rule Financial

member since

2011

location

London

Summary profile See full profile »
As Executive Director at Rule Financial I am responsible to clients for advising how best to impr...

David's expertise

What David reads
David writes about

Who is commenting on David's posts