A year-and-a-half after coming into force, the first pillar of the European Market Infrastructure Regulation finally took hold last week as OTC swaps traders were required to report transactions to one of the six trade repositories registered with the European Securities and Markets Authority.
For the major dealers, reporting swaps transactions is not new, having been caught in the Dodd-Frank net for mandatory swaps reporting since April 2013. But compliance with the European regime has proved challenging given some stark differences and ongoing uncertainties.
“The real challenge is that Dodd-Frank applied to a small number of entities and while the top 25 are ready for the EMIR deadline, the European regulation is being felt by another one million-plus entities,” said Luke Zubrod, director of risk management advisory services at Chatham Financial.
In a survey of 200 end-users, the risk advisory firm found that only 4% had completed steps towards compliance, while 52% were not even certain whether they were required to report under the new regulations.
“As a treasurer with broad responsibilities, you have been hit by wave after wave of regulatory requirements both in the US and Europe,” said Zubrod.
“With EMIR, we reached the same point as we did in April 2013 in the US, where it became clear that the market wasn’t ready and extending the compliance deadline for some market participants was essential,” he said. ”Many US users are very surprised that European regulators don’t have the ability to delay.”
In addition to the fact that EMIR applies to exchange-traded as well as OTC derivatives, a major difference between the EMIR and Dodd-Frank reporting requirements is that both parties are required to report transactions under the European regulations (see “EMIR poses key buyside test”).
There is an option for clients to delegate reporting to dealers, but many have found the service is not as easy to come by as previously assumed.
JP Morgan and Wells Fargo are among those believed to have chosen not to offer the service to clients, while Barclays is heard to be only offering it to a small number of key clients.
Banks argue that delegated reporting is not the full-service solution many end-users had been led to believe it was, as clients would still be held responsible for any errors or omissions. In addition, banks offering the service would be required to report swaps transacted between the client and other counterparties, but might not have access to the required data.
Since it became clear to a growing number of end-users that there was no quick solution to the reporting issue, there has been a rush to connect to trade repositories and access third-party reporting services. According to Regis-TR, one of the six approved repositories, volumes in the testing environment increased sixfold between the November 7 registration date and last week’s go-live date.
Eleventh-hour UTI guidance
With so much uncertainty heading into Wednesday’s deadline, a set of eleventh-hour guidelines were provided by ESMA last Tuesday, answering some key concerns on a range of outstanding issues – notably the most appropriate methodology to generate unique trade identifier codes that must be agreed by both counterparties on every transaction.
“A lot of our members already had reporting requirements under Dodd-Frank and had the mechanism to produce a trade identifier that also could be used under EMIR, as long as it is agreed with the counterparty. But what many players have been working towards in the absence of guidance may now need to be adapted following ESMA’s February 11 release,” said Clive Ansell, head of infrastructure management at ISDA.
Robust and universal methodologies ensure that trade identifiers, which can be up to 52 characters long, are unique and cannot be replicated across other jurisdictions.
ESMA’s latest guidance, which addresses outstanding concerns on a range of OTC issues including central clearing and trade reporting, presents four methods as a step towards avoiding replication. But not all are permanent solutions and there is no confirmation yet whether users of the temporary solution will be forced to re-code those trades after it becomes obsolete in February 2015.
ISDA aimed to build a market consensus in June last year with the publication of “best practice” guidelines for creating trade identifiers through the established US mechanism to ensure that the relevant codes could be communicated within the required T+1 reporting deadline.
“Everyone agrees that the UTI needs to be globally unique and there have been a lot of conversations on the best approach to achieve that. We tried to establish a best-practice methodology and workflows on how to communicate it quickly,” said Ansell.
While ESMA has included that industry-recognised standard in the agreed methodologies, the regulator considers it sub-optimal and it will only be available for one year. The method replaces the legal entity identifier with an alternative code, such as the CFTC USI Namespace or a shortened prefix, when generating the full code.
Lessons learned
With the last-minute grappling for additional information and many uncertainties still outstanding, many hope that ESMA will take a more cautious approach to the introduction of mandatory clearing, which should take effect next year, and consider phasing in compliance as was the case with Dodd-Frank.
“All firms are starting at the same point, but a phased-in approach may have made things easier as firms that are familiar with the processes could have focused on their understanding of what’s required before assisting clients,” said one market participant.
So far, half of the registered repositories have reported day-one data. ICE Trade Vault Europe saw 4.5m trades entered from 300 market participants, while Polish repository KDPW accepted 112,000 transactions. London Stock Exchange-owned UnaVista backloaded 5.8m trades before the go-live date.