The focus has now shifted:
10 months have passed since derivative industry participants met the 12th February 2014 deadline for European Market Infrastructure Regulation (EMIR) Transaction Reporting. Focus to date has been on ensuring all in-scope trades were reported to registered trade repositories, and remediating trades which did not. This remediation effort will continue but with the European Securities Markets Authority (ESMA) and trade repositories now focusing on accuracy of reported trades, the pairing and matching of both sides of the reported trade is the next big remediation exercise.
The scale of the issue:
Due to the dual sided nature of ESMA reporting, each trade submitted against European Economic Area (EEA) counterparties should be paired and matched with the other counterparty’s submission. During this process a Unique Trade Identifier (UTI) should be generated and included on the submissions. Until very recently, the trade repositories did not produce reports to provide visibility on pairing and matching performance. This new transparency on pairing and matching performance has uncovered industry-matching rates to be as low as 30%, with some counterparties having more than a million unpaired trades.
The remediation steps:
- Develop in-house metrics to measure and report discrepancies: take existing trade repository reports and develop consolidated reports highlighting each trades matched status by counterparty.
- Ring fence resources to remediate the mismatches, pair and exchange of UTI’s: prioritise remediation resources to manually pair unpaired trades based on key economic fields and agree by counterpart who will generate the UTI to prevent further discrepancies.
- Pool or share resources across industry participants to speed up the remediation: optimise remediation resources across the industry by pooling remediation resources to solve the discrepancies once for both parties and feedback actions to both parties.
- Develop aggregated industry metrics on remediation performance: produce industry metrics to consistently measure individual counterparty and collective counterparty remediation performance.
The lessons learned:
The industry has shown in the past, for example in 2005 when faced with a backlog of outstanding OTC Derivative confirmations, by working together and following these 4 simple steps, backlogs can be reduced very quickly. In 2005 the industry pooled its resources, set up face-to-face forums, used consistent reporting metrics and reduced the outstanding backlog of OTC Derivative confirmations. 10 years on, is 2015 the year to bring back the “lock-in”?