“Simplify derivatives reporting rules”, urges campaign

ACT joins industry groups in call for ‘entity-based’ system to replace patchwork of current measures

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:

1. An entity-based reporting framework should be adopted across jurisdictions Dual-sided reporting is complex and costly, and has not provided demonstrably improved levels of data quality. However, an entity-based reporting framework can provide the required level of trade information and reduce burdens on derivatives end users.
2. Existing methods, not dual-sided reporting, should be used to identify mismatches in trade terms Execution and confirmation processes already serve an established and legally binding role in rooting out discrepancies in trade terms. Using trade reporting for this process is unnecessary, ineffective and adds further complexity to the process.
3. A tie-breaker system for determining the responsible reporting party should be implemented consistently The reporting entity and unique trade-identifier generating party for any specific trade can be determined by application of a reporting party hierarchy and ‘tie-breaker logic’. ISDA has developed an industry-backed tiebreaker protocol specific to each asset class.
4. Legal responsibility for non-reporting counterparties to verify trade reports should be removed Some jurisdictions that assign reporting responsibility to one counterparty still require the non-reporting counterparty to verify data accuracy, supplement data or provide information associated with the trade, such as whether or not it is required to report. But this ‘dual-sided reporting in disguise’ presents unnecessary cost burdens.
5. Greater focus should be placed on global data harmonisation efforts Entity-based reporting can only work within a global, fully harmonised reporting system. Global regulators should align their reporting rules, and data fields should be based on existing market practices.

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.”

Download ISDA’s full paper Improving Derivatives Transparency: The Merits of an Entity-based Reporting Framework.