The road to transparency in financial markets is a rocky one. Trade reporting measures introduced in February 2014 were met with a few raised eyebrows early on – not because they weren’t necessary, but because of the sheer volume of work that was required for firms to get on board. For the first time, every derivatives user was required to report their side of a transaction to one of six trade repositories around the world, in a bid to minimise risk in this inherently chancy market area.
“It was a big challenge, not just because it was so large, but because it was so broad,” says Danny Corrigan, CEO of the CME European Trade Repository. “In Europe, around 60 million trades are reported every day. The vast majority of these are exchange-traded derivatives, but they also cover interest rates, foreign exchange, equities, commodities, and credit.”
Lack of clarityUnsurprisingly, a few speed bumps soon came into view, as trade repositories found most trade data impossible to grasp. In theory, they only needed to play a pairing game to match a trade, tagged with a unique trade identifier (UTI), with each of the firms that reported it tagged with a legal identity identifier, to paint an accurate picture of the day’s trades. However, somewhat unclear regulations around generating these tags meant that both parties in a trade did not always generate the same UTI. Varying reporting obligations and trade definitions across jurisdictions are just some of the issues that arose.
During a panel discussion at the 2014 Futures Industry Association’s IDX conference in London, it emerged that repositories were able to match just 30% of over-the-counter (OTC) derivatives, and a mere 3% of listed trade reports – a far cry from the level of transparency that was intended.
Changing technological trends have also stoked a few concerns around data processing. Big banks have recently shown an increasing
amount of interest in services such as Blockchain, the giant digital ledger that tracks Bitcoin information. Data stored on here is encrypted and near-impossible to tamper with; if use of such platforms becomes commonplace, extracting relevant data could become even trickier.
30%
The percentage of OTC derivatives that repositories were able to match in 2014
3%
The percentage of listed trade reports that
repositories were able to match the same year
Source: Futures Industry Association
Ironing out the creases
But the picture is not completely bleak. Efforts to harmonise the data being fed into trade repositories should ease some of these initial teething problems. The European Securities and Markets Authority (ESMA) will publish a review of EMIR in August this year, following a series of recent reports and an open hearing in Brussels.
One alteration being strongly mooted is a move away from dual-sided reporting to single-sided reporting, so that only one party in a transaction would report for both. ESMA’s Technical Standards Review due in 2016 is expected to suggest a hierarchy for the reporting process, stating that the UTI would need to be provided only by the clearing house.
This would take a long time to implement, but as the CME’s Corrigan says: “Had the reporting been single-sided, one would naturally assume that a reporting entity would report both sides of the trade to the same trade repository, and the likelihood of them reporting correctly is much higher.”
Corrigan is also keen to see universal product identifiers introduced, to more clearly label the types of trades that take place. He explains: “At the moment, you generate a whole series of numbers which mean nothing at first glance – if you look at them, you can’t work out what they are. The authorities believe introducing UPIs could take two years; we think it could be done in a month."
Adaptation will be keyRegardless, the focus of trade reporting process will change as the second Markets in Financial Instruments Directive (MiFID) and a new regulation (MiFIR) comes into play. At a recent
CISI panel event, Frontiers of Finance, Norton Rose Fulbright’s Tara Mokijewski described the prospective transparency regulations as “much more thorough and extensive”.
“There is a similarity with EMIR,” she said, “but there is a place where both paths diverge. With EMIR, we were concerned with things like clearing and settlement. With MiFIR, your data is really focused on the execution and the transaction.”
As such, new data service providers will also need to enter the market in order to fulfil these new data requirements, and all bodies will need to adapt.
Nonetheless, firms appear to be approaching these upcoming changes with a much calmer outlook. Mokijewski said: “People are looking more perspectively at MiFID II and MiFIR. They’re looking at the lessons learned from EMIR… and asking themselves, ‘What can I build on?’ Already, they’re trying to anticipate what they’ll have to report, what they’ll have to build [and whether] they’ll need intermediaries to assist.”
So, it seems that firms are carrying their hard-learned lessons forward, but the work isn’t over yet. As the CME’s Corrigan says, the trade reporting process is something that “we need to put right – not just for the CME’s sake, but for the industry’s sake.”
The CISI will be holding a related event, Operational challenges in regulatory reporting, on Monday 12 October, 2015 at Bloomberg’s offices, 39 - 45 Finsbury Square, London. For further information please visit CISI's events page