Regulations around reporting on derivatives trades must be drastically simplified to slash costs and complexity in the market, according to a campaign from the International Swaps and Derivatives Association (ISDA).
Launched on 13 April, the campaign points out that the derivatives industry is currently wrestling with a patchwork of different regulatory regimes in the reporting field that have sprung up since 2009, when post-crash reforms began to emerge from G20 governments and key, regional legislatures.
Aiming to influence those very same lawmakers, ISDA’s campaign has won the support of 11 other trade bodies in the finance arena – including the Managed Funds Association and the Coalition for Derivatives End-Users – together with professional membership body the ACT.
ISDA argues that the market must adopt an ‘entity-based’ system, whereby sole responsibility for reporting is assigned to a single counterparty via an automated hierarchy process. That, it says, would lead not only to more consistent reporting, but overall improvements in data quality.
In a paper outlining the campaign’s position – Improving Derivatives Transparency: The Merits of an Entity-based Reporting Framework
“Even in cases where only one party is required to report,” it adds, “some jurisdictions require the non-reporting entity to confirm the accuracy of the data reported by the other party, to supplement the data or to confirm it is not required to report a trade. The rationale is that these forms of dual-sided reporting obligations will improve the quality of the data reported. However, evidence has shown this is not the case.”
For example, the paper says, “Confirmation execution rates are generally at or above 90%, whereas pairing rates at trade repositories used in dual-sided reporting regimes are around 60%. Matching rates are assumed to be even lower than this. Dual-sided reporting also creates cost and complexity for end users, with little apparent gain.”
ISDA estimates that the total expenditure just for traders who are implementing the EU’s dual-sided system exceeds €100m. With that – and other costly regimes – in mind, it makes five recommendations and sets out reasons for each one:
ISDA chief executive Scott O’Malia said: “Effective data reporting is absolutely essential to the derivatives reform programme set out by regulators. ISDA and its partner associations believe that a workable, globally harmonised reporting system can only be achieved through the broad adoption of an entity-based framework.”