Trade Reporting Requirements: EMIR vs. Dodd-Frank and Making Sense of Your Global Obligations
As mandatory reporting of OTC derivatives takes effect globally, Andrew Green, Global Head of Derivative Account Management, DTCC Deriv/SERV LLC, a trade repository group company owned by The Depository Trust & Clearing Corporation (DTCC), explains the differences in reporting requirements under the Dodd-Frank Act (DFA) and EMIR to help financial institutions understand how they can comply with their global reporting obligations.
Q. EMIR vs. DFA – what are the differences in trade reporting rules between these two regulations?
A. I would highlight 3 major differences between the US and the EU regulations on derivative reporting:
1. Implementation philosophy: In line with the differing regulatory philosophies on either side of the Atlantic, DFA has taken a rules-based approach which is highly prescriptive as to the process to be implemented to achieve the stated goal whilst EMIR has taken the typically European principles-based approach which is clear on the objectives but relatively less prescriptive on the implementation process.
2. Report timing: Europe has opted for a reporting deadline of T+1 whereas DFA requires reporting on the day of execution and in most cases, is required 30 mins after execution.
3. Scope: One of the most significant differences concerning DFA reporting requirements and EMIR is the scope; the former requiring mandatory reporting of over-the-counter (OTC) derivatives only whilst the latter requires mandatory reporting of both OTC and listed derivatives. EMIR also requires the reporting of the collateral associated with the derivative trades, which is a unique global requirement.
Q. What are the major reporting deadlines?
A. The last major compliance date for the DFA rule is 10 April 2013 when all the remaining reporting entities have to start reporting the trades that they have executed but which haven’t already been reported by a US Swap Dealer. We are still waiting for confirmation of the timeline the SEC will define for its part of DFA.
For Europe the current dates indicated by ESMA are 23 September 2013 for credit and interest rate derivatives, and 1 January 2014 for FX, equity and commodity derivatives (for any changes to these timelines refer to the ESMA website: http://www.esma.europa.eu/page/European-Market-Infrastructure-Regulation-EMIR)
Q. Can dealers report their trades ahead of the mandatory deadline?
A. Historic trades dating back to the enactment of DFA in July 2010 needed to be reported to a trade repository and our experience in the US is that many dealers chose to pre-seed live positions prior to the mandatory compliance date to make the actual reporting of new records easier once go live has commenced.
We anticipate similar behaviour in Europe ahead of the mandatory reporting deadlines identified above.
Q. What data will need to be reported?
A. Each regulator requires a minimum set of primary economic terms, or PET data fields to be reported and while there is significant overlap in the fields defined for each regulation, there are some differences between the US and Europe The collateral and valuation data requirements, for example, are more extensive under EMIR.
Specifically, the European Securities Markets Authority (ESMA) requires the ID of the portfolio of collateral held against each individual trade is reported. EMIR reporting is also looking to collect more data about the rationale of the trade such as if it was executed from a commercial or hedging perspective as well as the identity of the beneficial owner. The data required under EMIR can also be segregated into two categories, (i) the ‘common data’ which is essentially the agreed trade and lifecycle data, and (ii) the ‘counterparty data’ which tends to be more confidential in nature as it will relate to beneficial owner, collateral etc.
Q. Who needs to report?
A. In the US, the reporting responsibility is placed in a one sided hierarchical order where the so-called ‘swap dealers’ take the majority of the reporting responsibilities. This reporting hierarchy is relatively straightforward to implement for most trading counterparties.
By contrast ESMA has adopted a model whereby both sides have the same reporting obligation but they may delegate the act of reporting (but not the obligation) to the other counterparty or an independent third-party. As noted above, the legal obligation for accurate reporting lies with both parties and smaller organisations such as corporates have the same reporting obligation as the dealers. So, for example, when two equivalent counterparties trade, it is expected that both will each report to a trade repository using the Unique Trade Identifier (UTI) which has been recognised and adopted as the universal prerequisite for effective trade reporting and aggregation The trade repository[s] will reconcile the reports and notify counterparties of any discrepancies. On the other hand, if a dealer trades with a buy-side counterparty, the buy-side counterparty may delegate the reporting of the common data to the dealer but will want to report the counterparty data itself. It is therefore important for each counterparty with the reporting obligation to look at their individual business requirements and understand how this impacts their decision on the delegation of the act of reporting.
Q. What are the internal challenges firms face as they prepare the data for reporting?
A. The majority of institutions putting in place the infrastructure to deal with these new reporting requirements, are doing this for the first time. Decoding where to source the various data elements is a critical first challenge. It is important to note that regulators want to know when the trade was executed as well as when the trade was confirmed and these are two very separate processes and the related information is frequently held in different parts of the institutional infrastructure.
For an institution operating in both the US and the EU, the major challenge from an operational perspective is that the US regulators rely to an extent on ‘snap shots’ of dealer positions at the end of each day being uploaded to the trade repository whilst in Europe, regulators require information on the individual life cycle events of each trade to be submitted to the repository as they occur. This tends to be operationally more complex and an area where institutions will need to focus in order to achieve compliance.
Q. Data fragmentation in the trade repository space?
A. The DTCC reporting framework is global, centralised and standardised and as such assists regulators by providing a single point of access to complete, accurate and relevant data sets. This approach enables market participants to submit their trades once and satisfy their reporting obligations in multiple jurisdictions thereby reducing the risk of data fragmentation and duplication. Indeed we believe we proved this value by building a central global credit derivatives repository that has served the industry well through such crises as the bankruptcy of Lehman and the many strands of the European Sovereign debt crisis.
Andrew Green is Global Head of Derivative Account Management, The Depository Trust and Clearing Corporation (DTCC)
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