Regulators in synch on need to improve trade reporting data quality

By Lloyd Altman | 27 January 2016

On December 17th, 2015 the CFTC Division of Swap Dealer and Intermediary Oversight (“DSIO”) sent an advisory to all provisionally registered Swap Dealers (“SD”) and Major Swap Participants (“MSP”). In the opening paragraph they clearly state that “Accurate and timely information and data is essential to maintain a transparent and well supervised swap marketplace”. This is 100% consistent with messages being delivered by other regulatory regimes. For instance, in April 2015, announcing a fine related to transaction reporting failures under MiFID, the FCA made a very clear statement that "Accurate and timely reporting of transactions is crucial for us to perform effective surveillance for insider trading and market manipulation in support of our objective to ensure that markets work well and with integrity."

Concerns regarding data quality usually come as a second step in all new regulatory reporting regimes. The first step that reporting firms, repositories, and regulators themselves take to comply with a new regulation is to implement a solution that meets the requirements by the established deadline. This allows regulators the chance to ensure that firms have complied and also to assess whether the data that they start collecting is accurate and complete enough to fulfill their mandate. The second iterative cycle that we are experiencing now is a natural progression that happens when regulators circle back to require more accuracy and /or details from reporting firms.

A third wave usually follows, which itself can be iterative, in which regulators refine and revise their technical specifications in order to improve the accuracy and effectiveness of the data that they collect. For instance, in 2015 trade repositories, banks, and asset managers needed to implement changes in order to comply with the ESMA L2 validations for EMIR reporting, which went live in October, and on November 13 ESMA published their Final Report on the review of the EMIR RTS & ITS for EMIR Reporting, which will be considerably more substantial than the L2 validation changes. According to ESMA the new RTS has three primary aims: convert the guidance issued in the Q&A’s, along with the L1 & L2 validations into a technical standard, introduce new fields and values to better reflect market practice and improve the data quality, and further align the fields, where possible, with the fields reportable under MIFIR for data elements reported under both regimes. The suggested changes will impact the way that firms report Collateral, Valuations, Counterparty Regions, Swap Frequency and Duration., Action Type & Level, Product Identification and Classification, as well as introducing new fields. Even though these proposed changes are still going through European legislative process, they are still scheduled to go into effect in Q3 of this year.

The CFTC DSIO Advisory letter highlights the need for supervisory control, including the reporting and timely identification and correction of any errors.  The Advisory Letter also recommends the introduction of a “Data Gatekeeper” to catch “Readily Apparent Errors”, such as large, small, or zero notional values, “Incomplete Reporting”, in which required fields are missing, “Duplicative Swap Reporting”, which can arise when both sides of a trade decide that they are the Reporting Counterparty, “Calculation Errors”, and “Reporting Delays” before records are submitted to a Swap Data Repository (SDR). This is In addition to normal validation checks that firms already need to make including data formatting of all data fields, including dates, number precision, and capitalization, enumerated values from maintained lists, field length to ensure that text strings do not exceed allowable character and reference data from internal or external trusted sources.

The Advisory Letter also recommends automated error detection and improved change management practices. The CFTC requires firms to report derivatives trades “As Soon and Technically Possible” (ASATP), so the requirement to introduce a data gatekeeper to check for the types of errors mentioned above will need to be in the form of a technical, rather than a manual solution.

For firms that trade in multiple jurisdictions, 2016 will be the busiest year to date for regulatory reporting business and technology groups across the industry. The SEC Regulation SBSR is still on schedule to be implemented this year, which will require backloading historical trades dating back to July, 2010. Additionally, as I discussed in my November 11, 2015 post, SEC reporting will be significantly different from CFTC reporting, including a different set of identifiers, timeliness requirements, and required data elements from the non-reporting party to transactions.

In summary, in addition to the investment in MiFID II compliance that will be a major initiative even if the compliance date is delayed, firms will need to see how they can meet the DSIO recommendations, combined with the need to comply with the SEC’s Regulation SBSR, with major changes to the ESMA EMIIR Reporting RTS right behind, making 2016 the busiest year yet industry-wide for groups responsible for regulatory reporting of derivatives.

By Lloyd Altman, Partner, Risk Focus.