As trade reporting under EMIR (the European Markets Infrastructure Regulation) enters its second year, a number of issues still remain unresolved. In an attempt to resolve some of the transparency issues around the mandate, which is designed to afford transparency into derivatives trading activities, ESMA (the European Securities and Markets Authority) has launched the Trade Repositories Project.
It has been launched alongside the Instrument Reference Data Project, which is similarly seeking to enable regulators of EU Member States – the NCAs (national competent authorities) – and ESMA, a central facility in relation to instrument and trading data, and the calculation of the MiFIR (Markets in Financial Instruments Regulation) transparency and liquidity thresholds. The NCAs will have direct access to the centrally pooled information under both projects.
Trade reporting is central to MiFIR and MiFID II (and has been central to MiFID I as well) via ARMs (Approved Reporting Mechanisms), as well as EMIR for derivatives via the six authorised trade repositories; DTCC, CME, RegisTR, KDPW, ICE and UnaVista. The Trade Repositories Project is expected to go live in 2016 with the Instrument Reference Data Project expected to go live in early 2017. The announcement from ESMA can be read here: https://www.esma.europa.eu/news/ESMA-launches-centralised-data-projects-MiFIR-and-EMIR?t=326&o=home
Focussing on EMIR, the Trade Repositories Project states that it will allow ESMA and the 27 NCAs overseeing EMIR implementation in their jurisdictions immediate access, “to the 300 million weekly reports on derivatives contracts received from 5,000 different counterparties across the EU trade repositories.”
Whilst the aim of the project is clearly an attempt to bring transparency and clarity to the EMIR trade reporting mandate, questions still remain. Chief amongst these are; how many counterparties are out there that fall under the purview of EMIR and should be submitting trade reports to a trade repository, and what are the regulators doing with the data? Having access to it is one thing; utilising it quite another.
The statement from ESMA at the launch of the Trade Repositories Project references “5,000 different counterparties”. The number of LEIs (Legal Entity Identifiers) in issuance, at the time of writing is 358,643 globally. Since LEIs are a vital component of trade reporting under EMIR, they offer some insight into how many reporting counterparties there currently are.
Each reporting counterparty - and both sides to a trade have a reporting obligation - has to issue its LEI with each report, since this enables regulators and those looking at the data to easily identify who the counterparties to any given trade are.
Given that 358,643 is a global number, with 85,740 of those having been issued to US entities, it is more relevant to look at the LEIs issued to entities within ESMA’s remit. Germany (39,107), Italy (31,889), France (24,991), UK (20,110), Luxembourg (17,937) and the Netherlands (15,419) all feature in the top-eight list of LEIs issued per country.
Even accounting for the fact that LEIs are not used solely for EMIR trade reporting and that not each registered LEI will be involved in weekly trading activity, there should be more than 5,000 reporting counterparties to the six EMIR authorised trade repositories.
Or so it would seem. One way of satisfying your reporting obligation is to use delegated reporting. This essentially means that a counterparty with the obligation to report can assign the duty, if not the underlying responsibility, to a third party. Whilst the basic function of submitting the report to a trade repository can be delegated, the underlying responsibility for the completion of the report, as well as its timeliness (T+1) and accuracy, remains with the obligated party.
If only around 5,000 counterparties are reporting each week, then this suggests that there is a large volume of delegated reporting taking place. This was widely anticipated as being the common method of reporting amongst buy-side firms, especially as a number of fund managers have outsourced their back and middle office functionality to custodian banks. Delegated reporting seems the only avenue available to such firms in satisfying this regulatory obligation.
Another challenge for the regulators, then, is identifying who is not reporting that should be, and dealing effectively with that – not to mention dealing with those who have reported, but not in a satisfactory manner. There were initial reports emanating from the trade repositories themselves that some trades were unmatchable because some fields in the reports, notably the UTIs (unique trade identifiers, which are generated to individually number every trade), were being made up by some reporting entities.
The Trade Repositories Project should at least enable the regulators a better chance of identifying those who are not reporting, as well as those who are misreporting, by giving more people a window to the data and being able to more easily identify where there is only one side of a report to a trade.
One potential issue with this, however, is that central banks are exempt from the EMIR trade reporting mandate. As active participants in derivatives markets themselves, this means that there will be a swathe of one sided reports received by the trade repositories as it is. Identifying whether the other counterparty to a one sided trade report is a central bank and, therefore, justifiably not reporting, or is a counterparty that has an obligation to trade but has not, will be difficult to say the least.
All of this adds up to making the other question almost impossible to answer as well: what are the regulators doing with the data?