Delegated Reporting in A New Regulatory Era- Does it Make Sense?

2017 brings the beginning of a number of impending reforms and regulations kicking in for the derivatives industry. Global changes on rules regarding margin requirements for uncleared swaps trades go into effect this year. Firms will also have to prepare for the implementation of the The Markets in Financial Instruments Directive, better known as MiFID II. This sample of regulatory changes highlight the sweeping push within the industry to move away from uncleared trades with steps towards global alignment.

One area that is hotly debated is the need for delegated reporting. Both large and small buy-side firms delegate their reporting responsibilities with the assumption that their trades will be reported correctly. Yet with these sweeping regulations comes a question from many buy-side firms, does it still make sense to delegate reporting?

In the most idealistic terms, yes it should. Why?

Introducing new regulations means introducing more information, which means abiding to a whole new range of required data. Institutions of all sizes must grapple with the reality that regulators from different jurisdictions vacillate with rules and release dates. The fragmentation of the regulatory requirements and timeliness caused by a lack of coordination among regulators leads to institutions not being able to fully adhere to rules that they are subject to. The issue becomes, can you complete a regulatory puzzle when you don’t have all of the pieces? Well, if delegated reporting works as it should, then yes … fuhgeddaboudit!

The reality though is that delegated reporting has been unreliable.  In the case of MiFID I, firms reported a laundry list of issues including data problems (incongruences, reconciliation, amendments), abiding by cross jurisdictional rules, and dealing with internal infrastructure challenges.  More importantly, delegated reporting does not delegate liability.  The onus remains on the buy side to ensure that the report is published by the sell side firm within the required time frames and without error.[i]  Why even delegate in the first place then?

Even with these issues, according to a Bloomberg survey, as many as two fifths of buy-side firms may want to delegate their reporting under MiFID II.[ii]  As industry leaders, we must learn from the history of issues related to current regulatory obligations (Dodd Frank, MiFID I etc.) in order to not repeat them.  

Data accuracy and reconciliation are integral to making delegated reporting services work.  Asset managers typically do not have robust tools to verify and validate that all reportable transactions have, in fact, been reported.  A buy side utility with integration capabilities to all participating parties could provide the missing link to an efficient delegated reporting system.  What this coordinated utility should provide is standardization from the outset, adaptive agility to the onset of changes, and ultimately an offset of delegated reporting issues.  All in all, an outsourced, standardized utility backed by a consortium of banks can ensure the success and value of delegated reporting amid an uncertain regulatory environment.  

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[i] https://www.bloomberg.com/trading-solutions/blog/buy-side-influence-si-determination/

[ii] https://www.bloomberg.com/trading-solutions/blog/6-reasons-not-delegate-transaction-reporting-mifir/