Trayport recently hosted a client forum to discuss the regulatory risk, compliance and technical challenges facing our clients and the industry as a whole. We wanted to understand how our customers are being impacted by Emir and how firms need to prepare in order to meet the Remit reporting requirements once they come into effect.
Based on these discussions, we found that there are a number of key themes of concern for the industry at the moment: including the discord around Unique Trade Identifier (UTI) generation and distribution, the backloading of trades and the potential cost impact on post-trade operations.
UTI generation and distribution
As has been the case under Emir and will be the case under Remit, all trades will need to be assigned a unique trade identifier (UTI). The challenge around the UTI is there is no prescriptive information about who should develop it and how it needs to be implemented. There has been some guidance from ISDA around UTI creation and distribution, but generally what we see happening is that larger players are creating their own UTI formats and sending them to their counterparties.
This has caused some discord in a market that is looking for an industry-wide solution covering a range of disparate asset classes. The ideal solution would be to have a collective approach to harmonising UTI generation, one that is logical and comprehensive. At the moment, no one has a road-map for how this will be achieved, and who the dominant driving force behind it will be; regulation-driven or industry-led.
There remains uncertainty on what to use for trades executed off-screen and whether this should be extended to everything. To do this however, would throw out the current convention, and no one wants to make this more expensive or complicated than it needs to be.
Backloading trades and orders to trade
The second theme that emerged focused on how to handle the reporting of backloaded trades. The backloading requirement for open trades could extend to any trade still outstanding when reporting starts.
This means firms will have to prepare for the possibility of supplying information on backloaded orders and transactions, both matched and unmatched. In addition, participants at the forum expressed uncertainty around whether there would be a requirement to fulfil backloading for orders to trade.
There are a couple issues here. The first is that historically most firms have not been collecting and storing their orders. This means that they might have to approach their trading venue to seek that information. The second issue concerns the lack of detail and clarity around the requirements themselves.
Firms aren’t clear yet what will be required of them. There is also little clarity on why the regulator requires this information, how it will be used and how the industry will benefit. In combination, the issue of backloading gave cause for concern, debate and call for greater clarity.
Cost of post-trade operations
The final prominent theme focused on post-trade operations. In general, the subject of the electronification of trades and more specifically the cost of trade confirmations. One key challenge facing our clients is the issue around moving from confirmations in T+4 to T+2. They will need to settle trades more quickly, move towards electronic trade confirmations and provide a much tighter timescale for their manual processes. The general concern was that if this entailed a move towards electronic confirmations, this could be expensive to execute, representing an additional and undesirable cost burden to the firm in order to be compliant.
The Remit Implementation Act has been delayed until the autumn, at which time firms will need to have structures in place to handle the demand of reporting requirements. Once the Implementation Act is in place, all the other Remit activities will follow, starting with reporting standardised trades six months after the Implementation Act.
At some point firms will also have to start reporting non-standardised trades. Finally, after the trade reporting requirements for standardised and non-standardised trades come into force, firms will be required to provide ACER with backloaded trades and orders. We expect further clarity on the actual dates of implementation within the next few weeks.
Given the differing degrees of confusion on the issues highlighted above and the delay in providing guidance, we have understandably seen concern in the market about what is expected from trading participants in order to comply with the upcoming REMIT obligations.
“There are many challenges when it comes to anticipating and responding to as yet undetermined regulatory obligations to become REMIT compliant,” comments Elliott Piggott, CEO, Trayport. “We have seen a growing demand from industry participants for a full service offering integrated with core market infrastructure rather than rely on internal software development. There is a recognition that the ongoing burden of regulatory reporting is proving higher than initially was envisaged.”