Firms are struggling to match their futures trades across different reporting venues under Europe’s new regulatory regime, blaming an absence of a consistent framework and a lack of understanding across the industry.
Trade reporting requirements under the European Markets Infrastructure Regulation (Emir) are aimed at increasing transparency in an opaque market, though flaws in the process are hampering this goal being achieved.
The mandate took effect four months ago accompanied by an eleventh hour Q&A as guidance on how to report the trades.
The Q&A though, now infamous throughout Europe’s derivatives industry, is somewhat down to interpretation and does not represent a fixed framework, more a rough guidance.
Subsequently there remains no consistent format for the 85 fields – made up of 59 common and 26 counterparty - which firms have to complete when reporting trades.
Should one piece of information be conveyed differently by either counterparty, the trades will not match.
“If one party uses a US date format and one a European it won’t match, it is little things like that, how you use decimals for example. There are dozens of these fields and a huge amount of data to report,” one industry expert told FOW.
“The data will never match up perfectly, not without detailed guidance on a higher level,”
Resolving issues 'crucial'
The issue is therefore not necessarily that counterparties are reporting the data incorrectly rather there is just inconsistency across the industry.
The actual figure for cross-trade repository matches has been touted at less than 1% by experts with knowledge of the process, highlighting how far away regulators are from market transparency.
A recent report from regulatory specialist JWG, said: “It is crucial that the industry resolves the question of how to fix these problems in a timely manner.”
Speaking to FOW, JWG chief PJ Di Giammarino said the industry needs a proper manual for the process.
“If we are going to do 120m+ reports a week, what is in these reports needs to be spelt out very, very carefully,” he added.
“If all we are able to do is pump data around Europe that doesn’t allow supervisors to make judgements, what was the point of spending billions on it?”
Initially problems around trade reporting stemmed from firms not having legal entity identifiers (LEIs) or unique trade identifiers (UTIs).
Some firms are using temporary UTIs, though this has led to confusion over whether counterparties can change the identifier once it is with a trade repository.
Speaking at the FIA IDX conference in London earlier this month, David Nowell, head of industry relations and regulatory compliance, UnaVista, London Stock Exchange, said ‘there is no excuse for not having an LEI’ four months after the initial deadline.
With those issues being addressed it is now the seemingly-simple task of matching the fields up remains the main issue.
“The problem is there isn’t a standard template for people to fill in so the fields are randomly placed and the data itself isn’t written in the right format,” said Virginie O’Shea, senior analyst, Aite Group.
“Especially if you are reliant on technology that looks for an exact match, and a lot of reconciliation technology does.
“Most systems are not cut out to make your life easier, you have to have pretty complicated algorithms to actually make sure you are matching in a tiered way.”
Many firms were left unprepared for the February 12 deadline with an expected delay not granted by regulators.
The second wave of requirements is set to come into force on August 12, with collateral and valuations coming under the mandate.
Firms are more prepared now than earlier this year, with existing infrastructure and processes in place, however this additional obligation when the existing format is not perfected could lead to even more issues.
The solution rests with either the regulators or the trade repositories.
“The regulators have pushed it back on the trade repositories. Esma put responsibility on TRs and the industry to report a certain way,” added O’Shea.
“I don’t know why it should be the industry’s responsibility to set the standards. A lot of the problems come from regulators not wanting to set standards because they don’t understand what they are trying to standardise.”
The Q&A on trade reporting is still the nearest thing to a guide the industry has on trade reporting.
Unfortunately there is no equivalent for over-the-counter reporting of the detailed 2007 Transaction Reporting User Pack (TRUP) compiled by the industry for MiFID I transaction reporting.
With many reconciliation systems unable to spot the difference between a mismatch and an inconsistency, the only way forward will be a proper framework across the European market.
“Overall, we have had a bit of a breakdown in ownership of the technical requirements,” added Di Giammarino.
“The TRs haven’t got together in any common way to promote standards to their customers who are meant to be on the same page. The firms and corporates aren’t on the same page and the standards bodies remain on the side lines.
“Who is going to step-up?”