21 October 2014

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Seven days and counting

05 February 2014  |  1535 views  |  0

In exactly one week’s time, the European Market Infrastructure Regulation (EMIR) trade reporting mandate, which forms part of broader regulation designed to de-risk the world of shadow banking, comes into force. From the 12th of February, both OTC and exchange traded derivatives trades will need to be reported to firms’ chosen trade repositories, which likely means that firms will submit their first reports by the 13th. Despite its imminence many areas of the trade reporting process remain unclear, and institutions will need to be mindful that next week’s deadline is only the first of many challenges they will encounter on their path to compliance. It would be prudent to consider this date as the end of the first sprint in an Agile project, as this approach will accommodate the high degree of ongoing change expected over the coming months.

Issues surrounding the upcoming deadline include:

  • The format and protocol for the creation and exchange of unique trade identifiers (UTIs) – critical to reconciling the two-sided trade reports
  • Confusion regarding the definition, and therefore reporting, of  spot and forward FX transactions
  • The population of some data fields, especially those for the unique product identifier (UPI)  and  those that are not applicable to the report for a given asset class
  • The allocation of legal entity identifiers (LEIs); many firms still do not have one. If a firm has one, will all its trading counterparties need to be added to its static? If not, how long will it now take to process an LEI application and disseminate the information?
  • The implementation of agreements and documented processes for delegated reporting
  • The reconciliation of trade reports, both within individual organisations and between multiple trade repositories

The latter point seems to be driven by each trade repository stating how they aim to reconcile and report back to submitting parties. However, this will rely on inter repository cooperation that is not yet publicly detailed, so it is hard to view this as a certainty.

The overriding question is, however, what will happen with all this new reported data? Given the issues outlined above, it is clear that many (or even the majority) of reports will be unreconciled during the first few days of the mandate. Firms could be faced with the operational nightmare of reconciling what may later transpire to be unreconcilable reports, whilst the underlying trade itself may be long settled.

Furthermore, it remains to be seen what the regulators will actually do with all this data and what it will tell them about risk exposures in the derivatives market. As yet there is no clear guidance from regulators as to what they will do with the information, or on what sort of reporting and reconciliation standards they will apply. Currently, the best advice to firms seems to be to create and submit a report of some sort when the deadline hits, even if it includes missing or invalid data. As for what happens after that, nobody knows. Will the regulators end up having to supervise and correct reporting process rather than processing useful information about the level of risk in the market place, which was the original intent of the regulation? What is clear is that there is still much work to be done in getting the basics right. Firms that fail to do this will certainly find themselves in hot water as yet more mandates come into force throughout the year.

TagsRisk & regulationPost-trade & ops

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