CME Group aims to deliver client compliance in trade reporting obligation

In the wave of regulatory reform that is being implemented globally, CME Group has interests across the board. It is still expanding its reach in Europe and is planning on offering a full suite of services to its clients in Europe – from exchange to clearing, right the way through to trade reporting.

Trade reporting is under way in the United States of America and CME is one of three swap data repositories along with DTCC and ICE that is accepting reporting data for regulatory consumption. The picture is a little more unclear in Europe at the time of speaking, since there are a number of applicants wishing to receive regulatory approval to act as a repository. If some reports are to be believed, CME is one of 12 applicants to ESMA (the European Securities and Markets Authority).

It is on this subject that we start our conversation with Derek Sammann, senior managing director FX & interest rate products at CME Group. “We launched our US SDR (swap data repository) service about five months ago and we’re very pleased with the results so far,” he begins. “We’ve captured around 13 million unique bilateral OTC transactions. Around seven million of those are coming in the form of FX products – the run rate right now is around 100,000 to 150,000 transactions per day, just in foreign exchange.

“We’re really focussing on the cost, which we see as very competitive. We very much see it as an additive service to the suite of products that CME already provides in the form of our listed derivatives and our clearing services. We try to think of this as a one stop shop for the entire pre and post-trade services that we offer our customer base.”

As we have covered here before, the Phase II mandatory clearing deadline in the US came and went without too many difficulties (http://ds.thomasmurray.com/opinion/phase-two-cftc-clearing-mandate-draws-closer and http://ds.thomasmurray.com/news/dodd-frank-phase-two-clearing-comes-and-goes). We spoke to CME’s Jack Callahan in advance of the event and he painted a far rosier picture of the future post-Phase II than some industry experts. We also spoke to Derek Sammann after the event…

“We learned a lot through the pre-mandate clearing and there were a number of significant players that said, ‘look, we know we’re going to fall under the mandate at some point so we’re going to get ahead of the ball,’” added Sammann about Phase II. “What we saw through Phase II in March is that rather than experience a contraction in clearing, we saw a massive expansion in volumes. In fact, just on 24 June we had a new all-time daily record of US$124 billion worth of cleared notional CDS and IRS through our platforms. Our open interest is also at an all-time high at about $2.8 trillion – that’s up 36% from the end of May.

“So, as we anticipated, working with our client base, working with our clearing firms and intermediaries in making sure that they were prepared so that there wasn’t a vacuum on the day (11 March) and low volumes, we experienced almost exactly the opposite with a significant increase in participation. Really, we’ve found the majority of the Category II clearing clients coming through for hedge funds and for dealers very pleased with the results.”

Indeed CME is one of the largest regulated FX markets and the volume of FX reporting through to its SDR in the States displays the confidence that its participants have in CME to deliver full compliance in the new regulatory landscape.

“In the US there are only three companies providing SDR services,” says Sammann. “When you look at the value proposition of what we actually do we have significant foot print in every major asset class out there. As such, we’re a natural place to send all of that OTC data to. We’re already connected to firms, so the differentiator on one basis is that it’s yet another service in addition to what we’re doing with our US clearing house and our US exchange, and increasingly as we look overseas, we’ll be adding a European trade repository as well. There’s a price piece, ease of functionality and ease of adoption – we want to make it as seamless as possible for customers to use CME’s solutions for whatever their needs are.”

Indeed, ease of adoption is a key element where the buy-side is concerned. Many of the regulations have proved something of a burden, so their choice of repository often comes down to which is the cheapest and which is the simplest. “What the buy-side has asked us to do is leverage their existing technology, infrastructure and connectivity to send their transactions to the most cost efficient location,” adds Sammann. “The ease of connectivity is particularly attractive to our buy side clients because they don’t want to see this as another layer of cost.”

It is also upon this basis that CME anticipates attracting custom to its European trade repository. It will leverage its infrastructure and connectivity to provide its clients with complete regulatory compliance. CME is viewing it as very much a value added service that offers clients all the solutions that it needs under one roof.

This is undoubtedly an attractive proposition to many clients since it can help save time and money. The easier it is to comply with the regulations, the better.

From a regulatory perspective, however, trade reporting is one of the central mandates arising from the 2009 G20 summit in Pittsburgh. It is in place to allow regulators to spot risky positions such as the London Whale and the unknown US$800 billion open positions at AIG that did much to facilitate the collapse of that company. At present, though, it is difficult to see how anyone will be able to calculate client positions. In the US, CFTC (Commodity Futures Trading Commission) commissioner Scott O’Malia has said that the information coming out of the SDRs would not enable them to spot situations such as AIG or the London Whale arising.

“At this point our job is to be able to help customers be compliant with the regulations,” says Sammann. “We’re collecting the data and making it available to the regulators as necessary. Our main job, though, is to be cost efficient and, most importantly, regulatory efficient to satisfy client demand. Our position on the SDR/trade repository side really is to respond to the client need on behalf of Dodd-Frank in the US and EMIR (European Market Infrastructure Regulation) and MiFID (Markets in Financial Instruments Directive) in Europe.” says Sammann.

The topic of aggregating positions in Europe has been discussed, and comments arising from the US suggest that it is an area of consideration there, too. Of the trade repositories that we have spoken to in Europe, there appears to be confusion over how this can happen. A lack of regulatory guidance is an obvious frustration at this point, and all of the applicants are awaiting further instruction.

One suggested path to aggregation is interoperability between the repositories, but there is, at this moment, no cohesive point of view. “We see our SDR solution in Europe and the US as a standalone,” asserts Sammann. “We want to maintain trust in the client and in the regulator. From our perspective, it’s the responsibility of the regulator to aggregate all of the information up from all of the repositories. At this point, we’re working between the customer, ourselves and the regulator – it’s that relationship that we want to maintain.”

It’s a justifiable position. There has been a tsunami of regulation and client compliance has to be the key at this moment. There is also a question of regulatory equivalency across multiple jurisdictions for companies such as CME to negotiate, as well as all of their clients.

The US has been quicker to implement its reforms than its European counterparts. There are differences between the US and Europe that are particularly acute to CME as it expands its operations into Europe. “I think that in analysing the regulatory approaches in Europe and the US, we have to consider that we’re in unprecedented times,” adds Sammann. “Post-AIG, post-Lehman, post-Bear Stearns; these were unprecedented events and as a result we’ve got unprecedented scope and magnitude of legislation that’s come through.

“In some cases there are legislations that are coming through outside of the boundaries of Dodd-Frank and those are the ones that concern us. In other cases it’s just the nuts and bolts of a 2,400 page document that is Dodd-Frank. Europe has been trying to work independently in finding the best solution, but the most important thing is consistency and the dialogue between the US and Europe.

“We’re seeing more consistency between the two than we did a year ago which is encouraging, but there are so many rules that are yet to be played out and deployed. We’ve got Basel III yet to be completely opined upon, we’ve got MiFID, EMIR and various pieces on the execution side. It’s an on-going dialogue and an on-going process.”

Consistency between Dodd-Frank and EMIR took a step closer to reality recently when the two jurisdictions reached an agreement over equivalency. There will still, ultimately, be differences between the two, but for the time being client compliance remains the key issue for CME.

Tags: CMEDodd FrankCFTCESMAEMIRMiFID