Beware the Ides of March: The drama of FX swaps reporting

By David Woolcock, Eurobase

26 March 2019

This week I have been dusting off last September’s Q&A release from the European Securities and Markets Authority (Esma) regarding the reporting of FX swaps to ensure we have successfully planned for the changes. That Q&A included reference data and transaction reporting scenarios where an FX swap is reported as a single stand-alone financial instrument. The Q&A implementation period was six months and to ensure a consistent approach across reporting requirements, Esma also published a Q&A on FX swaps reporting under the European Market Infrastructure Regulation (Emir), which should be implemented 12 months after its publication, as it is more difficult to implement, but the two are harmonised to ensure consistency.

Therefore, as of today we have the following coming into force: “If the instrument admitted to trading or traded on a trading venue was an FX swap, it should be reported as an FX swap based on the requirement of Article 27(1) and in accordance with this Q&A.”

In other words, FX swaps should be reported as a standalone single transaction rather than the customary methods used for decades of booking, and latterly, reporting two linked single transactions. Also for FX platforms and associated bank front office systems it’s often usual practice to book the two forwards separately, confirm them separately and settle them separately rather than book them as an actual FX swap; they are more usually treated as two linked transactions in these systems.

Given the operational difficulties, (Isda FX 2.0 taxonomy, for example, does not have an instrument type FX swap), in reporting FX Swaps as standalone instruments many market participants have looked at the Opinion published in March 2018 by Esma concerning packaged transactions which reads as follows and fits nicely for FX swaps:“Package orders and package transactions (‘packages’) are defined respectively in points (49) and (50) of Article 2(1) of MiFIR. As it results from these provisions, in particular, packages include two or more financial instruments, where each component bears meaningful economic or financial risk to all the other components and the execution of each component is simultaneous and contingent upon on the execution of all the other components.”

Following meetings held by industry bodies such as the European Venues & Intermediaries Association (EVIA) and the GFMA’s Global FX Division (GFXD) market participants are proposing to book FX swaps as packages and to refer to these packages as FX strategies (FX strats in short form). In a note from the GFXD in December 2017 the following conclusion was arrived at: “the GFXD supports that for the purposes of MiFIR transaction reporting and transparency and Emir trade reporting requirements, a FX swap is a package transaction consisting of two FX forwards, a near and far leg and that this representation should be considered irrespective of the tenor of each leg.” They noted in their assessment “the existing post trade reporting obligations, globally implemented under the 2009 Pittsburgh G20 commitments, including Emir, where FX swaps are widely reported as two individual FX forwards, linked with an appropriate ID”.

Adopting this approach obviates the need to create hundreds of thousands of ISINs for FX swaps as a standalone instrument and feedback has indicated that NCA’s will accept reporting as to how trades are defined at execution by trading venues and for off venue bilateral transactions. Thus, the current practice of executing two trades that transform into FX swaps will change, subject to consensus, and the two trades will transform into FX strats. Beware the Ides of March - but there are strategic solution to help solve the problems.

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