Banks struggling with European reporting rules

Having met deadlines for reporting trades to a data repository under the US Dodd-Frank Act, banks are turning their attention to reporting in the European Union (EU) under the European Market Infrastructure Regulation (Emir) – but they are finding the new regulation throws up more issues than expected.

“There was a general view that because data had already been sent to the US Depository Trust & Clearing Corporation (DTCC) and been onward reported, the big building blocks were in place. That’s not a completely incorrect view, but we are seeing more challenges to delivering according to the Emir regulations than was initially expected,” says Richard Norman, head of FX and money market operations at Royal Bank of Scotland (RBS) in London.

Banks are now working to meet the technical standards on trade repositories published by the European Securities and Markets Authority (Esma) last September as part of the process to implement Emir. The standards were endorsed by the European Commission in December and approved by the European Parliament in February.

The Emir regime differs from Dodd-Frank in terms of timing of reporting, the inclusion of collateral reporting and the fact it also covers exchange-traded products. But by far the most significant difference relates to which entity reports the trade. Under US rules, one party – the dealer – is responsible for ensuring a transaction is reported, but Emir holds both parties to a trade accountable. This raises questions about how each counterparty will apply a trade reference identifier to trades at the appropriate part of the process, and how they will ensure those identifiers match.

“The way the one-sided reporting requirement was carried out in the US meant that only the reporting party had to apply a trade reference identifier to the trade, and so the issue of both counterparties needing to have the same reference at a point in time wasn’t so heavily tested. Under Emir, the way identifiers are used will have more of an impact,” says Stewart Macbeth, London-based president and chief executive of DTCC Deriv/Serv, the organisation selected by the industry as its provider of trade repository services to meet Group of 20 reporting obligations in 2011.

The reporting of foreign exchange trades will require more process tweaking than other derivatives asset classes to meet the EU requirements, claims Bill Stenning, head of clearing, regulatory and strategic affairs at Société Générale Corporate & Investment Banking (SG CIB) in London. That’s because transaction matching in foreign exchange has evolved along a different path to other asset classes, he explains.

“In interest rates, for example, a substantial part of the market uses a central matching process, whereas in FX firms often exchange Swift messages, and match them in-house. If there is a central match, each party knows the common trade reference very early on in the process, but, without the central process, the workflows for exchanging trade identifiers are different,” he says.

Under Emir, a counterparty is able to delegate the reporting to the other counterparty or to a third party. However, derivatives users are required to complete several data fields that aren’t included under Dodd-Frank – and some of those are specific to the counterparty. That means banks reporting on behalf of their clients will need to assess how they will get that customer-related data in order to report it.

“It is going to require some data-gathering – and if a corporate is trading with multiple banks, they’re going to have to go through this multiple times. Some fields aren’t items that are currently captured at the point of trade, so banks will need to look at whether this is just a seeding effort or whether this requires a bit of a behaviour change as well at the point of capture,” says RBS’s Norman.

There is an additional complication for clients carrying out intragroup transactions – some corporates will enter into large trades at the treasury desk level and allocate that internally between legal entities. Dealers would have limited information about such transactions, making them difficult to report, says SG CIB’s Stenning.

The uncertainty around reporting on behalf of clients raises a business concern for banks, adds Steve French, director of product strategy at post-trade technology provider Traiana. If banks don’t report on behalf of their counterparties, clients might choose to take their business elsewhere. And if they do report, they must decide whether they will provide the service to all clients or just a select number. “Some buy-side firms are wondering whether they’re going to be looked after by all their counterparties or just a few. In which case, should they just do the reporting themselves?” he says.

The DTCC reports it has seen greater engagement on behalf of the buy-side, both from fund managers and corporates – a trend it attributes to the Emir requirements. However, most companies are far from being ready to begin reporting, says Martin O’Donovan, deputy policy and technical director at the Association of Corporate Treasurers in London.

“The regime isn’t really in place yet. Although trade repositories exist, they haven’t been approved in Europe and aren’t really marketing themselves. Equally, the banks that might do reporting for clients are not marketing that particular aspect, and systems providers that could add a data capture module into clients’ systems don’t seem to have an offering. So everyone is well behind,” he says.

Firms subject to Emir will be required to report certain foreign exchange trades from January 1 next year, provided a trade repository for FX is registered and able to accept reports by then. Otherwise, the deadline for reporting is 90 days after the registration of an FX trade repository. Despite the complications, banks are confident they’ll be ready to meet the reporting deadline. Macbeth says the DTCC has submitted its application to register as a repository in Europe, and believes it will be up and running in time.

“Esma has a formal process and is reasonably exacting in what it is trying to do, so the process may take some time. But I don’t see the registration taking so long that it will affect the January 1 deadline for FX,” he says.


This article was first published on Risk

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