Europe’s buyside derivatives users are on the cusp of the biggest shake-up yet in the way they trade swaps, as mandatory reporting of all OTC and listed derivatives becomes a reality on February 12.
US swaps counterparties have already made the shift, reporting transaction data under Dodd-Frank since last year. But a reporting hierarchy that determines which party shoulders responsibility for submitting data has ensured that reporting is almost exclusively carried out by swap dealers.
Corresponding regulation across the European Union, the European Market Infrastructure Regulation, or EMIR, casts the net much wider, forcing counterparties on both sides of a derivatives contract to report transaction data to a registered trade repository.
“EMIR is a big step as it’s the first time that the buyside are really on the hook,” said Brad Levy, CEO of MarkitSERV. “The reporting requirements are around 50%–75% similar to Dodd-Frank, but it would be closer to 90% if there wasn’t the key difference of both sides reporting the trade.”
That difference reflects a concerted effort from European policymakers to promote competition in the reporting framework. Six repositories have so far been registered by the European Securities and Markets Authority.
“It’s healthy to have competition, but that does create some additional hurdles and complexity,” said Steve French, a director at pre-trade and post-trade processing firm Traiana. “ESMA wants to ensure all parties take responsibility and if you look at some of the more stringent rules under MiFID II, you see this is necessary.”
“EMIR reporting is crazy. The ISDA/FIA document only just came out, a few counterparties are just starting to come to us with those documents now”
Concerns surrounding double counting have raised the importance of a smooth trade identification system. While Dodd-Frank applies tie-breaker logic to determine which counterparty generates the unique swap identifier, EMIR requires both counterparties to generate a unique trade identifier. Recently issued ISDA compliance guidelines rule that UTIs must be shared and one selected by both parties prior to reporting.
“EMIR reporting is crazy. The ISDA/FIA document only just came out, a few counterparties are just starting to come to us with those documents now,” said Amy Caruso, a director at Babson Capital, speaking at TabbForum’s Fixed Income 2014 conference.
Many are seeking the assistance of third-party services. Through Harmony TR Connect, Traiana offers clients connectivity to four ESMA-registered repositories: DTCC, CME, REGIS-TR and Una Vista.
The firm also offers a third-party UTI service that applies the same tie-breaker logic used under Dodd-Frank.
MarkitSERV, meanwhile, connects to just the DTCC in Europe and eight other repositories around the world.
Delegated reporting
Many corporates and asset managers are opting for EMIR’s delegated reporting model, which enables firms to mirror the Dodd-Frank approach by delegating the reporting responsibility to a non-EU counterparty that is already reporting the trade under its local regime.
“We’ll probably see disparate levels of conformity in the early days. Banks are largely ready and some clients have been back-loading for a while, but the guidance is clear that as long as you have a plan in place you will be treated favourably,” said French. “The real worry would be if clients were trying to comply and finding that they couldn’t.”
Despite widespread fears that next month’s implementation could prove a bumpy ride, many support the European stance of applying the reporting requirement more widely.
“For regulators, the goal is to know more and see more and it’s going to be a struggle in the short term. But it does make sense to make more people accountable. To solve what the industry needs to solve, everyone needs to know what it is that we need to do,” said Levy.
