The European Securities & Markets Authority has introduced an additional layer of validation for registered trade repositories to ensure the completeness of data submitted on swap transactions under the European Markets Infrastructure Regulation.
As part of a newly published question and answer paper relating to the implementation of EMIR, Europe’s key swaps market regulator unveiled a new two-step process that will be effective from October to ensure reporting is performed according to the new regime and in line with rules set out in the technical standards.
The latest action comes alongside a wider review into swap data reporting standards, which have created a complex web of often unusable data due to the variations that exist across borders, and between individual repositories.
US regulators – a good few steps ahead of their European counterparts in implementing OTC derivatives rules – are beginning to clamp down on reporting with hefty fines (see “CFTC clamps down on ’untenable’ reporting rules”, IFR 2076), and some believe that ESMA’s latest clarification could signal an important move by the European derivatives regulator before national regulators step in with similar enforcement action.
“This is the first step in looking to improve the quality of data,” said Paul Gibson, business consultant at Sapient Global Markets, which provides advisory services and technology solutions for regulatory reporting standards.
“The industry is doing a lot to try and harmonise reporting requirements across jurisdictions. ESMA’s dual-sided reporting makes it easier to see that there are data quality issues as it’s obvious to see where trades are not paired.”
Unlike Dodd Frank reporting rules, ESMA requires both counterparties to report details of a trade to registered repositories. To ensure data quality that paints a true picture of risk in the system, counterparties must agree unique trade identifiers at the point of execution and those trades can be paired though a straightforward acknowledgement message.
However, it is something that many firms are still struggling to manage and the low pairing rate has highlighted the need for improved standards.
Two-step process
Under the first step in ESMA’s validation process, which has been in place since December 1, registered TRs must determine which fields are mandatory in all circumstances and under which conditions fields can be left blank.
The second layer has been established to address concerns surrounding how trade repositories can verify completeness and accuracy of reports submitted by reporting entities.
ESMA’s Q&A – the nearest thing that the regulator has at its disposal to the CFTC’s “No Action Relief” as one industry lawyer recently commented – sets out detailed requirements and formats for more than 80 separate fields.
“TRs should reject the reports which are not submitted in line with the reporting requirements specified in the validations table,” ESMA notes in the paper.
It notes that the second-level validation requirements will apply to all new reports, although updates to transactions reported before the start date of second level validations will not be subject to the new requirements.
Rising compliance cost
The impact of fragmented trade reporting standards was a key topic at ISDA’s AGM held in Montreal last month and cross-border harmonisation of data rules is a primary goal of the Financial Stability Board.
Earlier this month FSB chairman Mark Carney confirmed that regulators must work harder to agree standards, increase data sharing and remove legal barriers to reporting counterparty identities (see “G20 mulls slow progress on trade reporting”, IFR 2079).
Exacerbating the compliance problem for dealers is a legacy of fragmented reporting procedures across individual firms. According to analysis from Sapient Global Markets, investment banks have spent an average of US$25m each to achieve reporting compliance under Dodd Frank and EMIR, and are turning to third-party providers as costs mount.
“There are multiple different solutions and it’s very costly to keep track. We recommend centralising reporting models before sending data to trade repositories, which is a cultural and mindset shift for most institutions,” said Gibson.
“We’re confident that there will be a mass shift towards centralised reporting in the end, but it might take a while to get there.”
In its paper, ESMA also responded to market participants that quizzed the regulatory body on potential reporting issues that can emerge as a result of modified maturity dates that are typical in a range of circumstances such as calendar trades in commodity derivatives.
According to ESMA, fields for reporting the maturity date of swaps transactions represent only the original date of expiry. When that date is subject to changes that are already foreseen, counterparties must send a modification report reflecting the updated maturity date.