Nov 28, 2014

The continued drive to eliminate market abuse in financial markets is now focusing on the energy trading markets. The already stretched reporting infrastructures of financial institutions have another transaction reporting requirement “REMIT” (Regulation on wholesale Energy Market Integrity and Transparency).  It’s time to learn some lessons from previous reporting regulation.

Tip 1: Understand the scope early – three areas to lock down :

  1. Transaction Scope – knowing which contracts , derivatives, and orders to trade for the supply and transportation of electricity and natural gas in the European Union, is critical. Equally, understanding the overlap with transactions already reported under EMIR will minimise unnecessary investment.
  2. Reporting Party Scope – agreeing which counterparty to a trade is the reporting party is vital in knowing who is responsible for developing the infrastructure. Unlike the Dodd-Frank Act where the US regulators defined the hierarchy of reporting parties, REMIT falls silent on this despite favouring the single sided reporting model, which needs an agreed hierarchy.
  3. Data Scope – REMIT requires – difficult to-source data fields (for example trading venue and linked order ID) that may not be readily available in financial institutions’ reporting infrastructures today. Sourcing and storing these fields should be considered now. REMIT permits the use of different counterparty codes (for example LEI, BIC), which increases the likelihood of trade mismatches when counterparties use different codes – a challenge those reporting under EMIR face today. Agreeing a standard now will reduce the need to clean up later.

Tip 2: Get prepared early – it’s going to happen:

  1. Interpretation – interpret the requirements now. Agreeing what should be reported, who will report, and when to report will simplify the business requirements.
  2. Infrastructure – agree the infrastructure now. Agreeing where the data will be sourced, how it will be sent, and how it will be reconciled will simplify the impacted infrastructure.
  3. Governance – defining both project and future support roles and responsibilities will ensure the stakeholders know what they are accountable for and what changes need to be made.
  4. Plan – a detailed implementation plan: From interpretation, to business requirements, to testing, to go live.
  5. Control – a review and control process to ensure timely and on-going compliance.

Tip 3: Work together – don’t go it alone:

Experience   implementing the Dodd-Frank Act, EMIR, and other regulatory reporting regimes across the globe forewarns us to quickly work together as an industry. Agreeing common interpretation, approach and standards is critical to ensure that when trades come together in the reporting infrastructure they will align. Implementing a review and feedback process with the regulatory authorities, responsible for monitoring firm’s compliance with REMIT, will ensure no surprises on either side. Identify synergies with the other reporting regimes, re-using, leveraging, and evolving the existing infrastructure. Above all – act now to ensure a smooth run in to compliance.