The European Markets Infrastructure Regulation (EMIR) outlined the European Unions response to the commitments made by the G20 at the 2009 Pittsburgh summit. Trade Reporting by both parties to a trade was a core tenet of this regulation. Despite issues implementing the trade reporting requirements under the US Dodd- Frank Act, industry participants faced difficulty delivering strategic solutions to meet the dual-sided EMIR reporting requirements. New inefficient processes were layered on top of old inefficient processes. However, from inefficiencies comes innovation, and as a result issues faced have become lessons learnt.
New industry identifiers: EMIR requires both Legal Entity Identifiers (LEIs) to be obtained and Unique Trade Identifiers (UTIs) to be assigned to trades before reporting. Obtaining and attaching these to new trades has been challenging enough given lack of golden sources or agreed industry processes. But amending trades traded prior to the effective date of EMIR has been equally challenging. Both new and old trades have resulted in a tremendous number of breaks across the industry.
Optionality on when to report: EMIR allowed both intra day and end of day reporting. Many industry participants re-used intra-day reporting, as mandated by Dodd-Frank, whereas other participants used an end of day ‘Snapshot’ approach. Reconciling multiple submission messages versus one single message on the same report again leads to large numbers of breaks.
Delegated Reporting: EMIR allowed for one party to delegate their reporting obligations to another party. This has led to duplicated submissions as the delegator and delegate have both reported the trade.
Trade repositories only validating that all fields on submissions were populated as opposed to the content of each field have compounded the above issues. Moreover due to the huge volume of reported transactions trade repositories have found it difficult to publish timely and accurate reports to industry participants.
Standard messaging: Industry participants focused on leveraging and enhancing FpML (Financial Product Markup Language) as a standard language for communicating trades to trade repositories. Adopting FpML has reduced the inconsistent and manual CSV reporting by industry participants and increased the timeliness and accuracy of reporting. If all industry participants embraced standard FpML messaging, matching and reconciliation would be considerably easier.
Technology innovation: there has been a boom in FinTech companies, leveraging FpML, delivering alternative reporting solutions to industry participants. The number of products available is not only improving the quality of solutions in the industry, but also keeping the costs of these solutions competitive. The development of these solutions will result in more timely and accurate reporting to trade repositories.
Front running regulatory requirements: regulatory reporting requirements will constantly evolve as transparency highlights new areas for future regulation. Industry participants should be proactive rather than reactive when it comes to future regulation and the infrastructure to support it.
What’s coming next?
MIFID II and EMIR validation stage II are the next trade reporting requirements to be layered on top of Dodd Frank and EMIR. For some, the near future is a period of great opportunity, but for others, despair. A question facing many industry participants is whether to stick with the previously developed in-house solutions or sign up to a new reporting solution provider. Although short-term costs of making the switch may be higher, in the long run they will be minimal compared to running and or adapting in-house solutions, or equally the fines associated with incorrect reporting. It is time, ahead of the next wave of trade reporting regulation, to embrace the lessons learnt from earlier reforms and deliver the right long term sustainable trade reporting infrastructure.