Nov 7, 2014

In the aftermath of the 2008 Global Financial Crisis, regulators imposed a requirement for transparency in global derivative markets. Trade reporting has emerged as central tenet within the new regulation, the aim of which is to identify and limit systemic risk associated with the OTC derivatives market.

In order to comply with reporting obligations, counterparties subject to the dual-sided reporting model have the option to delegate reporting responsibility to another counterparty, or third-party platform. While this service is beneficial, particularly to smaller buy-side firms, the delegation of reporting responsibility, particularly with regard to collateral and valuation statements, may undermine the purpose of trade reporting by masking potential areas of risk.

1. Differing Reporting Models
The Dodd-Frank Act (US model) adopted a single-sided reporting model under which reporting responsibility is borne by one counterparty only. Conversely, Europe (EMIR) and Asia opted for dual-sided reporting which requires both counterparties to an in-scope transaction to report the trade to a Trade Repository.

The EMIR dual-sided model is, in theory, a safer arrangement insofar as mismatches between trades being reported may flag areas of disagreement between counterparties, and potentially highlight sources of risk. Notably, this double submission requirement should work to eliminate any mis-quoted or over-inflated valuations, which have in the past caused havoc in derivatives markets.

2. Rationale for Delegated Reporting to meet EMIR Trade Reporting requirements
Many of the smaller buy-side firms do not have the capability or resources to build the necessary infrastructure required to report trades. Delegated Reporting allows these firms to take advantage of the knowledge, resources and IT infrastructure available to the larger sell-side firms in order to comply with reporting obligations. The corollary is that this model allows sell-side firms to develop a competitive advantage by offering the service. Crucially, each counterparty remains wholly and entirely responsible for the accuracy of the reported data.

3. Delegated Reporting undermining the Dual-Sided Model?
If mismatches in individually submitted trade data serve to flag potential areas of risk and contagion, then Delegated Reporting, by submitting near identical trade reports by the same counterparty, turns the Dual-Sided Model into a Single-Sided Model, thus undermining this objective.

4. The problems with Delegated Reporting: Collateral & Valuations
From 12 August 2014, eligible counterparties were, for the first time, required to report daily trade-level Collateral and Valuation reports to a Trade Repository. While the original Directive for the reporting of Collateral and Valuations required both counterparties to send their own Collateral and Valuation statements, this was subsequently rescinded to allow the Delegated Reporting Model to apply.


Independent reporting of significantly different valuations could serve to indicate that one counterparty uses a different model or curves to calculate valuations. How a counterparty values their own contracts may have significant knock-on effects on that counterparty’s PnL, decision to call/requirement to post collateral, and risk strategies. If a firm has, for the purposes of reporting, ceded their own valuation process to a third party, then the submission of only one party’s valuation masks the discrepancies that would otherwise be picked up by Dual-sided reporting.


Collateral reporting illustrates the daily shift in margin calls between two counterparties to a trade. Oddly, the Delegated Reporting is such that, in the instance where a bank must post margin (the mark-to-market value of a trade shifts in the favour of the client), the bank will report this trade as ‘uncollateralised’, despite the bank’s own house reporting unveiling a collateral amount posted. This could leave up to six/seven figure discrepancies between house and delegated trade reports, a step away from reporting consistency.

5. Should we abandon Delegated Reporting?

Both Dual-sided and Single-sided trade reporting models aim to provide transparency into counterparty exposure. Through understanding who is exposed to whom, regulators (assuming there exists the technology to process this data in the trade repositories) can start to understand where the greatest exposures lie and can work to limit the risk associated with such exposure.

The benefits of Delegated Reporting to the smaller buy-side firms (NFC-s) are clear, given it would not be cost effective for them to develop capability to report on their own behalf. As the trading volume of these counterparties is relatively small, they are unlikely to have any broader destabilising effect on the wider financial system. Moreover, as trade reporting does not replace the confirmations process, discrepancies in trade details are unlikely to be significant, and there is therefore no reason to exclude NFC+ and FCs from delegating reporting of basic trade economics.

However, many prominent indicators of risk are being masked by allowing Delegated Reporting of Collateral and Valuations. While this is unlikely to change, the Regulator should consider more stringent requirements for the submission of these values. If the Collateral and Valuations statements submitted to the Trade Repository were used as a Golden Source, counterparties would be more inclined to ensure the accuracy of their trade reports, be it through more adept trade reconciliations tools and faster resolution of discrepancies. Market participants should then look to work with the industry to understand and input into the various market initiatives trying to use valuations and collateral to automate margin calculation, messaging, netting and instruction space.

While Delegated Reporting would appear to undermine the Dual-sided reporting model, its business efficacies are clear. NFC- counterparties will no doubt have need for the service offering, while NFC+ and FCs should be encouraged to report their supplementary Collateral and Valuation statements themselves.

Delegated Reporting should therefore be applied with limited scope to aid in reporting mobility. However, industry participants should be forward thinking in ensuring the quality of the trading data reported. The benefits of a mutually agreed repository of trade data are widespread, which should be seen as a key incentive to market participants alongside regulatory compliance.