The bulk of attention to new European rules concerning derivatives trading has been focused on the imposition of mandatory clearing, but little on another key part of the debate: transaction reporting.
As part of the Group of 20 agreement in Pittsburgh in 2009, global leaders called for more over-the-counter derivative contracts to be reported to trade repositories.
In the US, via the Dodd-Frank act, they have emerged as Swaps Data Repository while the European equivalent is the Trade Repository, as established under the European Market Infrastructure Regulation.
They share many features and integrating them into trade and post-trade workflow involves effort across the industry. Harnessing and using the data they contain will require further effort on the part of the authorities who are the principal customers for these data.
However, it is also clear that there are crucial differences between the US and European approaches. TRs will be applied to exchange traded derivatives as well as OTC products. This continues to cause implementation challenges as the requirements, and indeed purpose, of a TR apply less than perfectly to listed derivatives.
While this headache absorbs significant bandwidth across the industry, other significant challenges also await.
Proposed EU legislation revising the Markets in Financial Instruments Directive and a parallel, directly enforceable Markets in Financial Instruments Regulation also aims to establish significant new transaction reporting obligations, across a broad scope of asset classes, to be reported via an Approved Reporting Mechanism.
Several ARMs already exist as designated by Mifid, but they largely cover only cash equity trades. The proposed Mifid revision will extend to other asset classes, such as derivatives, substantially changing these utilities.
Beyond that, the source of challenge is that the Mifid II/Mifir transaction reporting requirements are in essence incommensurate with those governing trade repositories.
TRs serve a prudential regulatory purpose – they will enable monitoring of systemic risk factors such as big counterparty exposures and concentrated positions at an industry-wide level. ARMs, in contrast, will report information aimed principally at conduct regulation – including large quantities of order level and contextual data designed to capture the trading decision process. The scope of data potentially required against these latter considerations is wide – for example, as well as trade data it could cover indicators-of-interest, orders, cancels/amends, and semi-structured trading dialogue.
So work done to respond to Emir transaction reporting requirements, either by those seeking to construct TRs or by those reporting to them, will certainly not in itself meet the Mifid II/Mifir requirements: in fact it may well not constitute any progress towards meeting these requirements at all, as it requires different data to be gathered and interrogated for a different purpose.
It is most likely that substantially different reporting processes, storage and interrogation capabilities will be needed. Against this reality, attempted reassurances around double reporting do not convince.
Among the potential outcomes of this include an increasingly complex landscape of different repositories and reporting processes, as well as another large industry-wide transaction reporting initiative, likely to begin ramping up just as the previous one is winding down. The resulting fractured reporting landscape will probably remain for years to come.
These outcomes are clearly bad; by increasing complexity they contradict the aim of increased transparency, as well as the broader desire to contain the cost to the industry of implementing regulatory change.
Moves towards writing the final rules for Emir are well under way. And while the previous Mifid had less impact than some predicted at the time, the political and regulatory climate is very different now. In the post-crisis environment the aims of the Mifid revision are unlikely to be discarded either. So while an industry fatigued by regulatory change may be tempted to hope that this will go away, it probably will not.
A refreshing response at this point would be for industry stakeholders and authorities to work jointly to agree on a vision for market transparency, including both prudential and conduct considerations, and aiming at a sustainable landscape which gives regulators the information they need, and the public the confidence they deserve, at a sensible level of cost and to a reasonable schedule.
It would then be possible for companies, regulators and other interested parties to produce an integrated road map to achieve this vision, minimising the necessity for rework and unnecessary effort and expenditure, and achieving a better outcome, quicker.
More broadly, the sooner long-term market structures are agreed, the sooner companies can apply themselves to the real business of trying to both meet the rules and compete within them. The broader economy can then benefit from the greater transparency and stability that the new environment aims to bring.
Kamal Mohindra is a financial markets expert at PA Consulting Group
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