Esma urged to flesh out trade reporting rules

European regulators need to provide more detail on how mandatory trade reporting will work in practice, as well as decide on which approach to take for reporting identifiers, say market participants.

The European Securities and Markets Authority (Esma) published a set of regulatory and implementing technical standards on trade repositories last September – part of a process to implement the European Market Infrastructure Regulation (Emir). The standards were endorsed by the European Commission in December and waved through by the European Parliament last month.

Those firms subject to Emir will now be required to report credit derivatives and interest rate derivatives contracts from July 1, assuming trade repositories for those derivatives asset classes are registered by April 1. If a repository registers after that date, firms will have 90 days before the reporting requirement kicks in. Mandatory reporting requirements for other derivatives come into force from January 1, 2014.

However, some market participants complain further detail is needed on how the reporting requirement will work in practice. For instance, the Esma standards specify that a counterparty can delegate the reporting of a contract to the other counterparty or a third party, such as the central counterparty. The regulator stipulates that if the reporting requirement is delegated, the resulting report must be as detailed as if each counterparty had filed separately – but participants say it is not clear how this would work in practice or who would be on the hook for any errors.

“Emir technical standards recognise that, in effect, one party could perform most of the reporting actions and the other parties still have some accountability for the quality of the data, but it’s not that clear what workflows are expected. Do they expect both parties in a number of cases to report or not?” says Stewart Macbeth, chief executive of DTCC Deriv/Serv.

Esma states that the assignment of a unique trade identifier will ensure data is not double-counted if reports are filed separately by each counterparty. According to the standards, each report should also include a legal entity identifier (LEI) for each counterparty and other entities involved in the transaction, and a unique product identifier.

Work is under way to develop a global system of identifiers, led by the Financial Stability Board – but an agreed set of standards have yet to emerge. In the US – where reporting requirements are already in force as part of the Dodd-Frank Act – the Commodity Futures Trading Commission (CFTC) opted to use a CFTC interim compliant identifier as a temporary measure until global standards are agreed. Some firms are hoping to build on the work they have done for Dodd-Frank to help prepare for Emir.

“We’re using a lot of the work done under Dodd-Frank to modify and now adapt it for Emir. A lot of the remediation work is taking on the new LEI fields and being able to store them and report on them,” says Nadine Chakar, head of products and strategy in the global collateral business at BNY Mellon.

But there are concerns the alternative codes specified under the Esma technical standards will set Europe apart from the US. Under the European rules, counterparties should use an ‘interim entity identifier’ if an LEI methodology isn’t available. If an interim solution hasn’t been agreed, parties must then use existing business identifier codes (Bics).

“Nobody wants to see Europe adopt its own solution and move further away from the global LEI goal,” says Tony Freeman, executive director of industry relations at post-trade processing firm Omgeo.

Developing an interim solution is not easy, though – meaning Esma will likely try to stay close to the principles agreed so far to develop a global LEI, says the DTCC’s Macbeth. “Esma is looking to understand progress on the LEI front internationally, as it may have issues trying to establish an interim identifier and it has realised that Bic doesn’t give it full coverage,” he says.

A similar issue exists for the unique product identifiers. If a standard doesn’t exist, Esma recommends using a combination of an assigned international securities identification number or alternative instrument identifier code with the corresponding classification of financial instrument code. If those codes are not available, Esma stipulates a simplified taxonomy, specifying asset class and instrument type.

Macbeth says an existing taxonomy developed by the International Swaps and Derivatives Association could be adopted, but claims Esma is looking for more detail to be included.

“I don’t know whether that would be necessary, particularly when combined with attributes of other trades. For example, with a credit default swap (CDS), if described with a product identifier as a single-name CDS, once you’ve understood the maturity date, the coupon and reference entity from the detailed instrument fields, you probably have a fairly good descriptor. Maybe it needs a restructuring type as well to be the detailed level product identifier that Esma may be looking for.”

 

This article was first published on Risk

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