Reporting under EMIR – what lies ahead?
By Ian McLelland, CEO, DTCC Derivatives Repository Ltd
Published: 22 December 2014
Almost one year since the trade reporting mandate came into force under the European Market Infrastructure Regulation (EMIR) buy-side firms have made good progress in meeting their reporting obligations, in addition to those under the Alternative Investment Fund Managers Directive (AIFMD).
The focus is now shifting from initial compliance with regulation to addressing data quality challenges to ensure that information reported to trade repositories can be used by regulators to accurately identify and mitigate the build-up of risk in the financial system.
The introduction of trade reporting in February 2014 was an unprecedented undertaking which mandated the reporting by buy-side and sell-side firms of both over-the-counter (OTC) and exchange-traded derivatives. This was followed six months later by the August 2014 deadline for collateral and valuation reporting. This required primarily all financial counterparties to report on a daily basis the mark-to-market value of their derivatives trades, whether a trade is collateralised and the value of collateral posted against that trade.
But the reporting implementation process did not stop there. Over the course of the year, regulators have been working with the industry to validate and improve the quality of derivatives data being reported to trade repositories to ensure that trades can be matched and reconciled efficiently. This has culminated in the European Securities Markets Authority (ESMA) requiring all trade repositories and the industry to meet certain requirements by 1 December 2014. This initiative, referred to as the “level one validation” process will require all trade repositories in Europe to reject ESMA reportable fields that do not meet specified reporting formats and patterns. There are 32 functional changes, but two examples are: the Unique Trade Identifier (UTI) for a reported trade cannot be blank and cannot be changed or amended once it is submitted to the trade repository. Also the field used to identify whether the trade is reported due to a compression event cannot be left blank and must contain a yes or no.
As we approach 2015, this initiative is set to be supplemented by level two and possibly level three measures under EMIR. Furthermore, August 2015 will mark the third year since the implementation of EMIR which is likely to be subject to further revisions by the European Commission. With these deadlines in mind, now is the time for firms to think about their current reporting processes and which reporting model is best suited to their specific needs.
For some firms, reporting directly to a trade repository may seem a more practical solution. However, as the 1 December 2014 compliance deadline approached, these firms had to ensure they were implementing the necessary changes to their systems and interfaces to meet these requirements. This has meant understanding and populating these new ESMA required fields so that their submissions will be accepted by their trade repository. Wherever possible, firms must also take advantage of user acceptance testing offered by their trade repository to ensure they are prepared to meet the requirements of the level one validation process.
These same firms must also think about how they can make the most of the services offered to them by their service provider, such as the different connectivity options, to ensure the reporting process is as efficient as possible. For example, the usage, frequency and volume of derivatives trading will play an important part in the decision as to which connectivity option firms adopt when reporting their trades to a trade repository. To give an example, low-volume users may choose to upload their trade reports using a web-based, manual spreadsheet, but medium-high volume users of derivatives may wish to adopt more automated solutions offered to them by their trade repository.
For buy-side firms who choose to delegate reporting, compliance with the level one validation process can be facilitated through their dealer counterparty. Under a delegated model, the buy-side firm’s dealer or a nominated third party will report both sides of the trade using one UTI so that a trade can be paired and then matched by a trade repository. The buy-side counterparty is then able to retrieve the UTI for reconciliation purposes, which has been generated on their behalf, from the reports sent to them by the trade repository. It is important to note, however, that although a buy-side firm can delegate reporting to their dealer or another third party, such as a custodian, they will remain responsible for the accuracy of the counterparty data submitted on their behalf. Longer term, as EMIR becomes subject to future revisions, buy-side firms will be able to look to their dealer or third party provider, who will continue to take responsibility for the reporting of their trades.
Reporting under EMIR continues to be a work in progress. Whichever reporting option a firm chooses to adopt, it is essential that they think about future developments. By acting now and ensuring long term strategic reporting solutions are in place, firms can be better prepared to respond to any changes ahead.