Risk Focus attended the premier Derivatives Regulatory Reporting conference of 2014 in London from June 17-18. The conference covered many significant challenges posed by financial institutions related to derivatives trade reporting in compliance with Dodd-Frank, EMIR and other jurisdictions.
Based on the input of multiple market participants and industry experts, the capital markets industry is experiencing significant pain in particular areas:
Lack of reconciliation within and between Trade Repositories is a major issue due to limited uptake and inconsistent use of LEI, UPI and UTI identifiers by financial institutions. Trade repository experts estimate that only 1-3% of trades reported by multiple counterparties can be reconciled across multiple trade repositories, and only 20-30% of trades can be reconciled within the same trade repository. This poses a huge problem for achieving the original aims of EMIR and Dodd-Frank — that regulators can get an accurate view on the systemic risk caused by derivatives trades. If the trade data does not match, then an accurate view of exposure cannot be achieved with the data reported to Trade Repositories.
There is significant ongoing confusion about the application of reporting jurisdiction rules. In particular what constitutes a “derivative” in some jurisdictions, and whether that jurisdiction has a reporting obligation (e.g. Switzerland vs. EMIR), affect both financial and commercial traders.
Substantial derivatives trading cost increases are apparent. Large reporting institutions are passing on IT and operational costs to their smaller clients, with expected drops in volume and decisions to remain in certain business lines. Major banks such as Commerzbank are taking a highly conservative approach to their own counterparties’ reporting obligations. Smaller institutions are now being forced to decide whether to incur the integration costs associated with delegating reporting to their money center bank counterparties, or investing in their own IT systems to report directly to Trade Repositories.
Buy Side participants such as pensions and asset managers are late to the game for EMIR (where they are included in the regulation) and Dodd-Frank (where they must report if they meet the MSP requirement). Across the board, the Buy Side has yet to make the significant IT investments necessary to self-report, and the Sell Side is not providing delegated reporting services at the same velocity as expected.
The pace and interaction of regulatory change will continue to drive operational and IT developments in the years to come. EMIR and Dodd-Frank, new regulation from Canada, Hong Kong and Switzerland, REMIT, MiFID, MiFID2, and more are causing dramatic changes to both market structure and the market role and participation of institutions across the globe.
Speakers and participants in the Conference included: European Commission, Financial Conduct Authority (FCA), HSBC, JPMorgan, PwC, Newedge, Lloyds Banking Group, Gazprom, Centrica, Commerzbank, JWG, Handelsbanken, Deutsche Bank, DTCC, TriOptima, London Stock Exchange, UnaVista, and more.