Data quality issues rising in delegated Emir reporting

By Rebekah Tunstead | 14 February 2020

Non-financial counterparties (NFC-) are looking to keep European Market Infrastructure Regulation (Emir) reporting in-house ahead of the delegated reporting deadline in June, according to consultants and a technology vendor.

Emir Refit reduced the burden of dual-sided reporting for non-financial counterparties which come under clearing thresholds. Instead of an NFC- reporting its side of an over-the-counter derivative trade, the responsibility will pass to its financial counterparty from June 18.

Despite Emir Refit coming into effect to ease the burden on NFCs-, many of these firms will continue to report on their own behalf, according to Ron Finberg, regulatory product specialist and business development, Cappitech.

“It really comes down to the responsibility [for regulation reporting],” he says. “For a lot of asset managers, it’s easier if you have four or five prime brokers, to have them report for you.”

But Finberg is aware of instances where regulators have gone to firms who use delegated reporting to inspect their Emir data, and found that those firms weren’t aware of what was being reported on their behalf.

In February last year, the Central Bank of Ireland (CBoI) sent a letter to firms who report under Emir, highlighting issues it had identified during it’s Emir data quality checks in 2018.

The regulator said it had identified cases where firms which delegate their reporting did not take “appropriate steps to ensure compliance with the reporting requirements”. It also “found instances of counterparties that have delegated reporting and are not aware of such reports nor their content”.

The CBoI declined to comment beyond the letter published in 2019 on whether it had gone in the past 12 months to any firms which avail of delegated reporting under Emir, to ensure the firms know the data being reported on their behalf is correct.

Responding to the same question, the UK’s Financial Conduct Authority (FCA) said in an email it “follows up with firms when we see errors in their Emir reporting, including those who benefit from delegated reporting arrangements. We ensure firms correct these errors and continue to stress the importance of accurate timely regulatory reporting.” But it failed to state whether it also has conducted any similar tests within the past twelve months, by the time of publication.

According to Daniel Lawlor, managing director of Irish consultancy firm Aquest, some issues regarding the quality of the reports are around closing out positions and updating valuations.

“It’s things like positions have closed out, but the reporting hasn’t been updated. So as far as the reporting is concerned, there are positions being reported that don’t actually exist anymore because they’ve been closed out.

“There are issues with proving valuations and updating the valuation of positions, issues with LEIs and UTIs as well making sure that they are used, the LEIs have to be updated every year, and making sure that the LEIs provided are actually valid.

Some NFCS- are putting money into outsourcing data quality monitoring, says Damon Batten, managing consultant, Bovill.

“We’ve seen an increasing number of our clients [buy-side firms] do their own due diligence testing and reviewing of the reporting that is being made on their behalf by their counterparties. They are collecting data from the trade repository and doing their own reconciliation against their own books and records. They are often finding reporting that is not satisfactory, that is not complete and accurate.”

And others are outsourcing their reporting to third-party solutions. But Batten says there have been a number of issues implementing such solutions.

“It is not as straightforward as plug and play to ask a third party provider to align itself to all your front office systems of which - depending on your complexity - there may be one or two, or there may be a significant number, and be able to interpret all of your different trading workflows and turn them into accurate Emir reporting,” he says.

“We see so many cases where a change is made to the front office system and the impact for transaction reporting either is not properly anticipated or not properly assessed, or there isn’t a proper change control process and you can go from reporting that is working relatively well to reporting that is suddenly completely broken.”

Issues around the quality of delegated reporting data have been occurring since the beginning of last year, says Finberg. And it is a problem which is particularly visible with asset managers who report on behalf of their funds.

“If you have an asset manager that makes one trade and it is being allocated to five or six different funds, each one of those funds will have to have their own report because they are a separate LEI,” he says. “And for a lot of companies it is difficult for them to be able to identify how a single trade was being allocated across all the different funds.

“In the fund world that is definitely an area where it has really started picking up. We were getting some questions about it a few years ago, but cost wise it wasn’t something that people wanted to invest in when their banks were already doing it. Then suddenly they are saying, ‘fine, the banks are not doing it correctly let’s look into this more deeply.’”

On February 6, the FCA told firms it had made changes to the Connect system for submitting notifications and applications under Emir, which came into effect on February 10.

The changes will notify the regulator when an NFC- is not reporting on its own behalf. Finberg says this may marginally increase matching rates of Emir reports, as the FCA will have a better overview of which counterparties will delegate their reporting.  

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