As with any new piece of legislation, things tend to be a bit chaotic at the start and for European market participants EMIR Transaction Reporting has proved no exception.
On 12 February 2014, just 90 days after six different trade repositories had registered with the European Securities & Markets Authority (ESMA), all those engaged in the trading of listed and OTC derivatives within the EU were required to commence reporting.
There have been reports of non-compliance and firms failing to meet the deadline, repositories such as DTCC being so overwhelmed with trade reports that within days they had to limit the services available to clients, confusion over what is a Unique Trade Identifier (UTI) and how to generate it etc.
But this should come as no surprise. To think that both counterparties to a derivatives trade would seamlessly commence reporting is optimistic at best. Of course there will be teething problems.
That said, SS&C GlobeOp, a leading fund administrator with a strong technology heritage running through the spine of the firm, has been more than happy with the success of its EMIR reporting solution thus far, which involves sending the trade files out to trade repositories on behalf of its clients.
“The most important part of it was communication. Clients were nervous leading up to the reporting date, requirements were changing at the 11th hour. For us it was key to keep our clients abreast of what was going on. The Clients are accountable for the filing and they put a lot of faith in our hands,” says Kenton Farmer (pictured), European head, OTC derivatives operations at SS&C GlobeOp.
“We got them over the line safely. We fed back to them general trends within the market, what was going on and what others were doing. Was there a big panic? No. Communication worked well and everyone got on with it.”
Under EMIR, all counterparties to derivative contracts traded in the EEA are required, at present, to report transaction details (type of contract, price, settlement date, parties to the contract, maturity). This August, collateral and valuation details will also need to be contained in the report.
Right now, Farmer says the focus is on ensuring that clients are kept fully up-to-date. This is achieved through daily pulse meetings during which account managers to all of SS&C GlobeOp’s clients’ share market information, technical/reporting issues that affected a particular client and how they were resolved, new file specifications etc. What this does, says Farmer, is “provide a forum within which we can address any issues or new developments straight away. That collective knowledge then gets fed back to our clients.”
In many respects, this is still the calm before the storm. The next big unknown on the horizon is what the Inter-TR Reconciliations will look like.
Part of the requirement under EMIR is that each repository has to reconcile its data with another repository involved in a trade. For example, a manager might be trading an interest rate swap with a bank but they might each be reporting to different repositories; the manager to CME Trade Repository Ltd in the UK and the bank, perhaps, to Regis-TR in Luxembourg.
Under the rules of dual reporting those two equals and opposites must match to ensure there is a consistent picture for the regulator to review.
That has yet to start.
“If it had commenced on Day One there would have been significantly more fall out because people are not only trying to report accurately they are also trying to resolve reconciliation breaks,” says Farmer.
Right now the repositories are still working together to determine how that reconciliation will take place. What will be the key data points that need to be reconciled? Will it be all 85 fields under EMIR?
“Probably not but I imagine what it will involve, in the early days, will be a smaller sub-set focusing on the UTI, the LEI and some basic elements of the economics of the transaction,” adds Farmer.
An LEI refers to Legal Entity Identifier and denotes each counterparty. The Unique Trade Identifier tags each trade.
Funds incorporated offshore or outside the EU are not required to report under the EMIR transaction reporting obligation however the exception to this is where the fund’s manager is authorised as an Alternative Investment Fund Manager under AIFMD. All of the funds managed by that AIFM will be classified as FCs for the purpose of EMIR, even if they are incorporated outside the EU and would have EMIR transaction reporting obligation including the retrospective reporting requirements
As part of its EMIR solution SS&C is helping with the backloading UTI requirement with Farmer confirming that “we’ve backloaded hundreds of thousands of records for clients’ portfolios. As a result we have some clients who, even though they don’t yet need to be AIFMD-approved, are starting to shadow the process to see what the results look like; the moment they become approved we can just flick the switch and they’re ready to go.”
As mentioned, the collateral and valuation element to reporting under EMIR is yet to come into effect. This will require further trade file enrichment. For administrators like SS&C GlobeOp, this is not going to be an onerous task given that they have robust operational processes in place to capture this additional data accurately and in a timely fashion. Every trade file must be submitted at the end of each business day T+1.
Presently, the solution is only available to SS&C GlobeOp’s clients.
“We’ve currently restricted our EMIR reporting solution to our clients only because we have full view of the universe i.e the entire trade lifecycle, valuation and collateral management is under our control, operationally speaking.
“Going forward it will be straightforward to extend the reporting operating model to include the valuation service (based on a client’s pricing policy) and also the collateral service that we provide. In my opinion, the administrator can play a much bigger role than other delegated providers given we have all the data elements. Trying to mix and match data for the transaction element, the collateral element and the valuation element from other external sources has the potential to be quite messy.”
Reconciliation between trade repositories, as well as these additional valuation and collateral reporting requirements, are further down the line. And even though it is less than two months since reporting under EMIR began, Farmer thinks there are plenty of positives to draw upon at this early stage.
“In times of adversity people tend to pull together. It’s been a long time since I’ve seen so many open forums, banks holding breakfast seminars, trade repositories sponsoring events and different groups coming together to collectively interpret how they are going to deal with the legislation. That has been refreshing to see. Open dialogue and sharing ideas has been a real positive.
“The feedback we’ve had on our reporting solution has been positive. Using the outsourced model, the fact that we had to do it for one client meant all our other clients benefit as well,” says Farmer.
This has led to SS&C GlobeOp developing a solution to help simplify what can sometimes be highly complex, multi-layered trades into a single structured product to report on. Rather than disentangling multiple IRS, assigning multiple UTIs etc, the net result is a single trade with a single UTI.
“We’ve created a Master-Leader trade structure. Normally clients book them using a number of different IRSs, FX options etc. We can still report it at the individual component level if required but what we’re trying to do is help evolve clients’ booking methodologies with their own systems,” explains Farmer.
If ESMA reaches its utopian goal with EMIR reporting, with two parties reporting data to a set of trade repositories who are reconciling on a T+1 basis, the result will be one of the biggest matching engines Clients and administrator could possibly have imagined.
From an operational risk perspective that has the potential for providing considerable comfort.
“It could become a very powerful tool in the risk management arsenal. It’s reporting to a common standard. We’re going to be matching data on a much more timely basis. If I knew I could look into my trade repository and see all of my matched results across all of my clients, that’s going to give me real operational comfort that we’ve got accurate data; that it’s a confirmed and accurate trade out there in the market.
How quickly that fully reconciled data between trade repositories is shared with administrators like SS&C GlobeOp and ultimately their clients – who will of course want to ensure that trades have been accurately priced and reported on – is yet to be determined. Will it be via a batch process throughout the day? Will it be a T+2 process? Only time will tell.
Whatever happens, SS&C GlobeOp has the operational model in place to effectively support the EMIR reporting obligations of its clients and move in lockstep as the regulation evolves to remove the burden from back-office teams. Indeed, the next step is to widen out the solution both with respect to the number of trade repositories but also the number of clients.
“Currently we report to two trade repositories: Unavista and DTCC. Clients do therefore have a choice but ultimately we want to report to all six in order to be fully agnostic. If services change at one repository it will allow clients to flip from one to another – just as they might do with prime brokers. If they have concerns with a particular TR they can ask us to start sending the reports to someone else.
“What we also plan to do is extend our EMIR reporting solution as a third party offering; that is, to clients who aren’t currently on our administration platform,” confirms Farmer.