The 3 Changes Necessary in the Trade Reporting Landscape

By Miles Reucroft, Thomas Murray

Originally published on TABB Forum

A number of issues with the trade reporting mandate in Europe has led some to call for a global aggregator for all trade repository data. While there is logic behind the idea, would not solve all of the problems that exist within trade reporting. Here are three steps that would result in a much more functional trade reporting landscape for Europe.

It is no surprise that there have been a number of issues with the trade reporting mandate in Europe. In implementing the G20 financial reform program, EMIR (the European Market Infrastructure Regulation) called for both sides of a transaction to be reported and a complex data field to be completed, with no uniformity of creation behind the identifiers that are crucial to identifying and matching trades.

Speaking recently, Patrick Pearson, head of the financial markets infrastructure unit at the European Commission, commented that there is merit in the notion of introducing a global aggregator for all trade repository data. The idea has some logic, but would not solve all of the problems that exist within trade reporting.

“The reason that people are looking toward an aggregator solution is the lack of pairing between the trade repositories,” says Daniel Jude, COO of CME’s European Trade Repository. “If there is one global trade repository, the aggregation is simple. But that does not remove the problems that exist with pairing. The problem comes from clients not generating the UTI [Unique Trade Identifier] correctly. Not every CCP [clearing house] provides a UTI, only the algorithm to create it.”

This is a point that has caused concern among the trade repositories. Since the trade repository landscape is a competitive one, one counterparty to a trade might be reporting to one trade repository, while the other could be reporting to another. Those reports then need to be paired before the data that is being collected is useful to the regulator, ESMA (the European Securities and Markets Authority).

If the reports are not paired, then the data has little use to ESMA, since it is neutered in its aim of shining a light of transparency into the opaque world of derivatives trading. “Even if you had a single trade repository, receiving both sides of the report, if the clients do not have the correct UTIs and LEIs [Legal Entity Identifiers], then the trades will never pair,” adds Jude.

“The lack of a global LEI is another key issue here,” he continues. “In some jurisdictions sole traders are still allowed to use client codes, which are very difficult, if not impossible, to start pairing, as they are free-format text. A global aggregator would not solve this.

“One thing that could, with a global aggregator, is single-sided reporting. This would remove the need to pair trade reports, if that is indeed the reason for introducing an aggregator.”

This is another topic that was touched on by Pearson recently. In the US, the mandate was introduced with single-sided reporting, so there have been no issues with pairing the reports across the three Swap Data Repositories (US lexicon for trade repository) that exist there, one of which is CME.

A move to harmonize the regulatory regimes like this would also make it easier for regulators to take a global view of what is going on, although regulatory equivalence in regards to trade reporting has been far more easily achieved than it has with regards to central clearing rules.

Jude also feels that the trade reporting mandate in Europe could be simplified with the removal of Exchange Traded Derivatives from its purview. “There are levels of transparency and risk mitigation that exchanges and clearing houses already undertake,” he reasons. “Further on from this, we believe that all CCPs should provide UTIs to clients. This would vastly improve the pairing process as there would be a consistency to the data. If you had single-sided reporting, then you would remove the need for pairing, but then you would also lose the depth of the data, so I can see why ESMA has requested dual-sided reporting.”

The third key issue that Jude identifies during our conversation is the need for porting rules to be put in place, making it easier for clients to switch their trade repository. In the maelstrom that followed the February 12, 2014, go-live date for the mandate, a number of market participants were left dissatisfied with their trade repository solution and sought to change their providers.

Due to a lack of porting within the rules, this was not an activity that could be easily undertaken. “It has been quite a problematic mandate,” says Jude. “Many clients signed up with trade repositories are now looking to move, but the lack of portability has really stifled that. We have spoken to ESMA about this and are hoping for porting to be introduced. This will be a good change in the industry, since clients will be able to move trade repository and continue reporting in the same way.”

With porting looking likely to be sorted imminently – proposals are with ESMA and a paper on the issue is expected in the coming weeks – the industry can then turn its focus to the outstanding issue of UTIs and their generation and, latterly, the inclusion of ETDs within the mandate.

Once these outstanding issues are resolved, CME believes that we will be left with a much more functional trade reporting landscape for Europe.