With less than three months until the end of October deadline for the European Securities and Market Authority’s (ESMA’s) new level 2 derivatives trade reporting requirements, Risk Focus has been shopping around a solution to help firms measure their compliance to the new regulations. The product, Validate.Trade, represents the first of several planned commercial products from a company that has spent 14 years building customized risk and trade processing solutions.
Validate.Trade validates trades just before they are sent to the Depository Trust and Clearing Corporation (DTCC), after the trade messages have already been transformed into the appropriate reporting format.
“That’s probably the point where there is a chance they have potentially broken the data; they might have mapped it incorrectly. It’s post-transformation, that step before it gets into the DTCC we can run these very expansive validations on the message,” said Risk Focus CEO Brian Lynch.
Trade messages that run through Validate.Trade essentially are matched with the sets of rules deemed appropriate based on the trade’s asset classes or other conditions. Validate.Trade pushes out a validation that the message is good, or a report outlining which specific rules the message failed. Clients can use the data to immediately correct issues and can also save it for future regulatory inquiries.
While simple in concept, Lynch said the reach of ESMA’s derivatives trade reporting rules, which affect anyone who trades derivatives in Europe from hedge funds to larger firms, has highlighted the importance of trade validation for a significant number of players. Interest has been particularly strong among top tier firms feeling pressure from regulators to prove their control framework. Eight top tier firms have already committed use the product, he said.
“ESMA Level 2 is a fairly wide-ranging impact that is happening to everyone reporting derivatives in Europe. From end of October, the regulators have said there are new data validations, there are new mandatory fields, there’s new values that you can and can’t use in different fields,” Lynch said.
A coup for the company came late this spring when the DTCC itself announced it would use the product with its Global Trade Repository (GTR).
“The DTCC realized there was a value for them. As they build out their specification and their own test cases to make sure that they are meeting the requirement, they can bounce those off our validation engine and see that they are aligned with each other. That’s hugely valuable to us because if they find a gap and decide actually their implementation is right, we can fix that and our clients get the benefit of that collective improvement in the product,” Lynch said.
The DTCC has told its customers that it would have a user acceptance testing (UAT) tool for reporting under the new requirements available by mid-September, Lynch said. As a result, for the moment Risk Focus is referring to Validate.Trade as a pre-UAT solution.
“Clients can run tests and if they have done it right, by the time UAT starts it will be somewhat of a rubber stamping exercise. They will definitely hit their deadline,” he said.