The European Market Infrastructure Regulation (EMIR) fulfils several of the EU’s G20 commitments to reform the derivative markets: to improve transparency, protect against market abuse and to mitigate systemic risk.
One of the key requirements of EMIR is the reporting of derivative transactions for five asset classes: credit, interest rate, FX, commodity and equity derivatives. These include OTC and exchange-traded derivatives irrespective of whether they are cleared or not.
As we enter the crucial two weeks before mandatory reporting of derivatives under EMIR is introduced in Europe, it is essential that corporates understand the details of their trade reporting obligations to regulators and ensure that they have made the appropriate arrangements to report. These include:
Corporates looking to meet their reporting obligations have three reporting options. They can connect directly to a trade repository such as DTCC’s European trade repository, delegate the reporting (but not the obligation) to their dealer if the dealer offers that facility, or delegate their reporting to a third-party intermediary, such as an IT vendor.
The usage, frequency and volume of derivative trading will play an important part in the decision as to which connectivity option corporates adopt for their trade reporting. Low-volume users may choose to use a web-based, manual spreadsheet upload, but medium-volume users may wish to automate their upload via web services. Lastly, messages in FpML format can be a more efficient solution for high-volume end users, and those with reporting requirements in multiple jurisdictions.
EMIR also mandates that historic trades entered into on or after 16 August 2012 will need to be reported to trade repositories by 13 May 2014. The fact that the reporting requirements date back to August 2012 and that much of this data may be hard to locate is leading many large organisations, which are in advanced preparation stages, to upload live historic trades in their systems before the go-live date with the view to making ongoing reporting less complex.
Data integrity and safety are key considerations for market participants when choosing a trade repository. Trade reporting engines are built to process many different message formats over multiple communication channels and provide real-time data distribution. As such, corporates must take into account the robustness of the infrastructure and the proven track record of their trade repository of choice.
Last, but not least, with regulations contributing to an increase in corporates’ operational and compliance costs, finding the most cost-effective solution to achieve compliance is paramount. Corporates should therefore choose the trade repository that offers economies of scale, provides choice when it comes to reporting and connectivity options (taking into account the volume of derivatives traded), and has no hidden costs.
In today’s environment, corporate treasurers have to cope with a range of issues such as market, counterparty and price risk across the different asset classes that they trade. By ensuring that they have a full understanding of their reporting obligations, corporates can effectively use the trade repository function as a means to monitor their exposure to their trading counterparties.
Reporting of all OTC and exchange-traded derivative asset classes is commencing on one single day and it will be a huge undertaking. So it is critical that corporates make provisions now, ahead of the 12 February 2014 implementation date. Failure to do so means that corporates will lose their ability to monitor and mitigate risk.
Stewart Macbeth is CEO of the DTCC Derivatives Repository