derivative reporting in europe

Introduction

There is a view, which owes something to Friedrich Nietzsche and even more to Benoit Mandelbrot, that patterns are discernible even in the most abject chaos. It is nevertheless disconcerting to find regulators, of all people, apparently engaged in the deliberate cultivation of a lavish degree of chaos in the financial markets.

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How ready were corporates?

Predictably, corporate counterparties have found derivative trade reporting under the European Market Infrastructure Regulation (EMIR) more challenging than their counterparts in the financial services industry. Unlike banks, they do not live and breathe compliance at work every day. Derivatives are handled not by teams of hundreds, but sometimes by a single individual in the corporate treasury department. Corporate treasury systems were ill-adapted to reporting derivatives.

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Who and what is affected?

The short answer to this is: everyone. From 12 February 2014 all derivatives counterparties were required to report details of any contract they have concluded - or which they have modified, novated, terminated or partially terminated - to a registered or recognised trade repository within no more than a single working day. That includes counterparties who are not involved in financial services.

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How ready were pension funds?

Pension funds were granted a (temporary) exemption from the obligation to clear their derivatives trades, but the European Market Infrastructure Regulation (EMIR) did not relieve them of the duty to report even uncleared trades to a trade repository. However, the exemption from clearing lulled some pension funds into believing they did not have to report from 12 February 2014 either.

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How ready were fund managers?

A survey of 40 hedge fund managers by SunGard and Aite Group in October 2013 was telling. Asked about their most pressing regulatory concerns, the overwhelming majority of respondents identified the Foreign Account Tax Compliance Act (FATCA) and the Form PF that must be submitted to the Securities and Exchange Commission (SEC) in the United States as their top priorities.

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LEIs: what they are, who needs one, and where to get one

The pressure from regulators to assign a unique code to every counterparty to a financial transaction is the gift of Lehman Brothers to the world. In derivative trade reporting it is, along with unique transaction and product identifier, the key to making sense of the data. It is not yet clear whether multiple issuers are part of the problem or part of the solution.

Categorised: Technicalities

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UTIs: what they are, who needs one, and where to get one

Codes to label trades between counterparties are essential to enable trade repositories to match counterparties, and reconcile trades with other repositories, but the European regulator did not publish advice until it was too late, and even then left ample scope for interpretation.

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UPIs: what they are, who needs one, and where to get one

The identification codes needed to tag accurately the derivative instruments being traded are proving hard to manufacture, not least because the European regulator has not offered firm guidance. This accounts for much of the difficulties repositories have encountered in reconciliation.

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Backloading: how far back does it go, and how hard is it to do?

Regulators have given derivatives counterparties more time to back-load their existing swap portfolios into the trade repositories. However, even back-loading is bedevilled by unique identifiers and, in this case, the difficulty of agreeing and assigning them to transactions which took place in the past.

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Reporting collateralised trades

With standard OTC derivative trades moving into a clearing model alongside exchange-traded derivatives and even collateralisation of non-clearable derivatives now mandatory, trade repositories are expected to collect information on the nature and value of the collateral posted against open positions on a daily basis.

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