Am I Overpaying the Trade Repository Fee’s?

Introduction

In 2011 global regulators embarked on an initiative to achieve standardisation and transparency in the over-the-counter (OTC) derivatives market. As part of this initiative global regulators developed new regulatory requirements leading to the creation of trade repositories (TR) across the globe. Participants now required to provide near real-time trade information to TR are faced with two challenges. First, firms must comply with evolving requirements from regulators, TR, and firms’ internal control requirements. The second challenge is shifting trading operations process and the technology environment supporting OTC asset classes while controlling costs and maximising value. Add to it the existence of 23 TR across 13 jurisdictions leading to more than one TR in a single jurisdiction. The combination of above factors has led to an increase in cost of reporting for participants and ambiguity in data aggregation from the regulators point of view.

Trade Repository Fee Structure

As the cost of implementing regulatory reporting requirements to TR has increased significantly against original estimates, any possibility of reducing the cost of reporting within compliance boundaries becomes critical. One possible opportunity identified towards this is fees’ charged by various TR. As with every business model TR have published a fee schedule based on their core competency. These fees vary across TR within the same jurisdiction and across jurisdictions due to the variance in reporting requirements. A high level summary of some TR fee schedule features is presented below –

The fees charged by TR are primarily driven by the number of unique positions created or unique swaps reported to a repository in a period of time. Some TR have adopted a model of charging a recurring fee on a unique position carried over from time to time, while some TR are charging a one-time fee per swap trade identifier reported to a repository. There are no TR charging fees based on the number of messages reported by a participant as this factor assumes technology capacity cost can be spread across TR data volume.

A majority of US based TR are charging fees to the reporting party and not charging any fees to the non-reporting party on a trade. Due to dual sided reporting and inclusion of exchange-traded derivatives European TR fee schedule include multiple clauses. At many times it goes to a granular level of charging fees based on the product. Firms with a delegated reporting service, in addition to other factors, should also evaluate fees charged by a TR under ESMA regulations.

What Firms Should Do

Firms should evaluate the fee schedule of a TR in addition to other considerations while selecting a TR for regulatory reporting. The data quality in trade booking, processing and reporting not only increases the operational burden of trade reconciliation, but also increases financially in terms of paying fees to a TR. A single swap trade will be charged multiple times when it is reported under multiple jurisdictions which, in turn, would mean multiple TR. Therefore, operations and technology trade reconciliation process should also include reconciliation of fees charged by a trade repository.

Some common areas for analysis are described below:

Transaction Based Fees per USI

• Trades booked against an incorrect counterparty and reported to a TR are commonly fixed by canceling the original trade and booking a new trade. Such incorrectly reported trades, even if trade is canceled on the same day, will be charged at the TR on a per USI basis. On the contrary it may not get charged at the TR charging on the position basis, as the cancelled trade should not create a position.
• Trades cancelled and rebooked on the same day or next day could increase the TR fee.
• Correctly linking allocated trades to the block trade is critical as some TRs do not charge any fees on the allocated trades against a block trade reported earlier to the same trade repository. Additionally some TRs set up by a clearinghouse do not charge fees on a cleared swap trade.

Position Based Maintenance Fees

• One common error category in reconciliation break resolution is “known issue and will be cleared tomorrow”. For this resolution if positions are created in a TR and exited next day a TR may charge a maintenance fee for the overnight position created even if the trade is outstanding for only one day.

Reporting Party Fees

• Incorrect trade detail submission may result in leading the TR to believe a firm is the reporting party, when in reality the firm is not the reporting party. For example, the Swap Dealer should be the reporting party on a trade between the Swap Dealer (buyer of swap) and the Major Swap Participant (MSP) (seller of swap). If the SD reports the trade as a MSP or the MSP reports itself as a SD on the trade, the MSP will be treated as the reporting party for TR’s calculation.
• Evaluate need for a voluntary submission where a trade reported by the non-reporting party to a TR could mean that the non-reporting party becomes the reporting party for the TR’s fee calculation.

Trade Execution

• A trade repository may charge an alpha trade lying in a TR without the equivalent beta or gamma trade. If a trade is executed and cleared on the same day under US law, creating three USIs in the TR, the participant member may not get charged as the reporting party would be the SEF for the Alpha trade and Clearing House for the Beta and Gamma trade.
• Identifying the trade reporting flow by the market utilities is critical to evaluate the TR’s fee structure. For example, a SEF trade execution platform can report the Alpha trade to its own TR or to a TR not sponsored by a clearing house. Similarly the Beta and Gamma trades may be routed by the clearing house to a TR which may or may not be sponsored by a clearing house.
• Trades booked under incorrect product codes as per the TR specification may also lead to additional charges.
• Trades reported under an incorrect jurisdiction may be charged by the TR under the jurisdiction. For example, an ESMA eligible trade also reported to a TR under US law incorrectly will be charged. Reporting a trade under the correct jurisdiction to a TR could eliminate such fees charged by the TR.

Fees Reconciliation

• Considering most firms have developed a consolidated regulatory reported project across business units and entities, the fees charged by a TR can be further allocated to the respective business unit. The allocation process should also highlight the operational and technology fix that can reduce the fees charged by a trade repository.
• Verify that the free trades offered by some TRs are not charged and the maximum upper limit fee is charged when the volume crosses the fee specification.
• Multiple entities of the same firm reporting to a TR could avail some fee concession.

 

By Vinod Jain, Head of Advisory Business, EZOPS

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