The G20 commitments have significantly increased the levels of disclosure, granularity, traceability, and regularity of reporting requirements across the globe. The high standards expected by regulators are a challenge to all market participants. The only thing that is constant with the regulatory requirement is the continual change. Since 2014, the European Market Infrastructure Regulation (EMIR) transaction reporting implementation has been wrought with challenges. While the industry looks at the current data quality issues, European regulators are requesting more granularity on the transaction reporting.
SS&C has seen several key trends emerge from this evolving regulatory climate. For example, firms are beginning to leverage technology providers to help them comply with regulations, improve data quality, increase transparency and consistency, and reduce systemic risk and compliance costs.
Large banks likely to move away from delegated reporting
Large banks are likely to move away from providing buy-side clients with delegated reporting services for over-the-counter (OTC) derivatives and exchange-traded derivatives (ETDs) as required under EMIR.
Banks could continue to offer the delegated reporting for a short term, as the service is tied to the execution and clearing fees. We are hearing feedback that larger banks are less willing to offer this service, and the implementation of the revised RTS would add another layer of complexity to their delegation model.
Revised EMIR RTS: what is changing?
The European Commission carried out an extensive assessment to ensure that the EU legislation is working effectively and efficiently. As a result, the revised regulatory technical standards (RTS) and implementing technical standards (ITS) on reporting under Article 9 of EMIR were published in the official journal on 21 January 2017. They will become applicable on 1 November 2017. All the reports submitted upon the date of the revised technical standards on reporting under EMIR must be compliant with the new standards.
The European Securities and Markets Authority (ESMA) has clarified the fields and the descriptions in the revised RTS. It added the guidance provided in Q&A to the regulatory text and increased the number of fields from 85 to 129. The new table will have 35 counterparty data and 94 common data to report.
In the revised requirements, sourcing the data and implementing the changes will be very difficult and complex. The changes include:
Unique Trade Identifier (UTI): Until global UTI is available, a UTI must be agreed to by both counterparties. ESMA added the hierarchy to the UTI generating party. ESMA stresses the importance of the counterparties agreeing to the report’s contents (including UTI) in a timely manner before submitting it to trade repositories.
Product classifiers: The product must be classified with an endorsed Unique Product Identifier (UPI) or a Classification of Financial Instruments (CFI) code. For the products identified through International Securities Identification Number (ISIN) or Alternative Instrument Identifier (AII), a CFI code must be specified. For products for which ISIN or AII are not available, an endorsed UPI must be specified. Until UPI is endorsed, those products will be classified with a CFI code.
Product identifiers: The product must be identified through ISIN or AII. AII must be used if a product is traded in a trading venue classified as AII in the register published on the ESMA website. In addition, the Association of National Numbering Agencies (ANNA) will release the Derivatives Service Bureau (DSB) platform for user acceptance testing in late Q1 2017. The DSB will go live in October, 2017 to deliver ISINs for the derivatives market.
Identification of index and baskets: The index must be identified using ISIN. In a case of basket, each basket component that’s traded on a trading venue must be identified with an ISIN.
Collateral reporting: Segregated information of margin must be reported; initial margin posted, initial margin received, variation margin posted, variation margin received, excess collateral posted, and excess collateral received must be reported daily.
Reporting of valuations: For trades centrally cleared, central counterparty’s valuation must be reported. For trades not cleared by a CCP, the methodology defined in the International Financial Reporting Standard 13 “Fair Value Measurement” must be used for reporting the value of the contract daily.
Trade repositories reconciliation information
Pairing and matching are the two reconciliation steps that are performed by the trade repositories to ensure the records submitted by both parties are reconciled efficiently. The first is the pairing process, where the Legal Entity Identifiers (LEIs) and UTIs are matched to pair the two trade submissions. The second is the matching process, where all reported data of a paired submission are compared.
According to DTCC’s GTR service has 26 percent of the market share of all transactions under EMIR; RegisTR has 34 percent, UnaVista 12 percent, CME 17 percent, ICE 10 percent, and KDPW 1 percent. Trade repositories have the responsibility to perform reconciliation internally and with other trade repositories as per the interoperability provision. This is to ensure that the trades reported by both parties are accurate and further avoid duplication of the transactions. The recent number published by DTCCGTR had the Inter-TR reports matching the rate at 0.59 percent (the 99.41 percent of the records submitted by both counterparties to different trade repositories don’t match).
UTIs have continued to be one of the main reasons for higher unpaired transactions at the trade repositories. Each reported derivative contract is required (by Commission Delegated Regulation [EU] No 148/2013) to have a UTI. The regulation requires that the UTI is unique but does not de ne how it should be generated or by whom. European regulators were late to clarify which counterparty to a trade is required to produce the UTI. However, unsurprisingly, there are many cases where both counterparties are independently producing UTIs and not exchanging them. As a result, the pairing rate is low. Still, with DTCC GTR, 28 percent of the records are unpaired. This has slowed down regulators’ ability to monitor the systemic risk.
The regulatory expectation is that all trades must be matched, which is a rather complex and sophisticated request. Deep learning techniques would be needed to analyze and resolve the billions of already-submitted EMIR transaction records.
Firms value greater oversight and governance when it comes to regulatory compliance. They do not want regulators knocking on their door. Regulations such as EMIR, Markets in Financial Instruments Regulation (MiFIR) and Securities Financing Transactions Regulation (SFTR) coming at different times and the shifting goal post of various laws has not made it easier to prepare. It is becoming increasingly costlier to run the business, execute growth strategy and onboard new regulations.
In principle, the regulation can contribute to an action plan through impact analysis, requiring firms to think through the regulatory non-compliance outcomes, and demanding justification for taking strategic actions. One of the aspects should be measuring and improving the perception of regulatory changes. There
is no magic wand to resolve the regulatory challenges. It is an extensive and tiresome work e ort to make a decision and to implement a solution.
Investment managers must look to automate the production of regulatory reporting so they can achieve regulatory compliance on time and at a reduced cost. Centralizing the data from different sources, leveraging security master, valuation, collateral, counterparties (and more) to create a reporting hub is proving to be beneficial in the long term. A regulatory reporting hub can be built on an end-to-end model, including the technology component, data re-use,
and transformations. Firms must consider regulatory compliance as a key component of their business strategy.