Trade reporting in Europe – interview with DTCC’s Stewart Macbeth

Trade reporting has become a global concern in the wake of the post-2007 financial crises as regulators have sought to bring more transparency and efficiency to the derivatives markets. DTCC is a company that is well placed to take a global view of the reporting mandate, receiving as it has, authorisation to act as a repository in the U.S, Europe, Australia and Japan. It is also working with the Hong Kong Monetary Authority on its implementation of trade reporting and is still looking at new markets into which it can bring its Global Trade Repository offering.

We caught up with Stewart Macbeth, CEO of DDRL (DTCC Derivatives Repository Ltd) and chief product development officer of DTCC Deriv/SERV to discuss what the next steps are for DTCC, now that it has been authorised as trade repository under EMIR.

Thomas Murray Data Services: What’s next for DTCC in Europe now it has received regulatory approval?

Stewart Macbeth: “This is only the start of a large block of work in terms of client on-boarding, testing and back-loading of trade data to ensure that we’ve got good, solid opening positions ahead of the commencement of reporting. So this is a trigger for a considerable amount of work.”


TMDS: You have received approval for you GTR in a number of jurisdictions, how important was it to receive approval in Europe?

SM: “It’s very important to us. The European market is a massive centre for OTC derivatives, representing 60% of global volumes in some products. In terms of our global position, Europe is absolutely key.”


TMDS: You have a network of GTRs globally, now. Can you report both sides of a transaction where a European counterparty has dealt with a foreign counterparty that reports into one of your GTRs, e.g. Japan?

SM: “The European counterparty would have the obligation to report under Article 9 of EMIR and we would receive that. The Japanese counterparty would potentially have a reporting obligation under the Japanese regulation and we would have that in our Japanese GTR. Right now we can share the European data with ESMA and the Japanese data with the JFSA, but in time, once the regulators around the world have agreed on standards and rules under which data sharing can take place, as a global trade repository we’ll be in a position to assist with aggregation of information on cross-border derivatives activity. The advantages are that we are using a consistent data format globally that can help to make aggregation and reconciliation a simpler process. This means that regulators would receive one report from us. This should also make for a better customer experience, too, since many are themselves operating in multiple jurisdictions with local regulations to comply with.”


TMDS: Are there any other jurisdictions on the horizon for DTCC?

SM: “Hong Kong is an immediate example. We are not going to be a local trade repository there, but we have established the interface to act as an agent for our clients in their reporting obligation to the HKMA’s trade repository. We are in conversation with other regulatory jurisdictions around the world, but it would be premature to promote those at this time. We need to fully establish the timings and nuances in each market. Right now the focus is on Europe where we are working to get through this next phase of implementation.”


TMDS: Do you have any direct links with CCPs, or third country CCPs, to fulfil their reporting obligations?

SM: “We are certainly operating in this space and are expecting to receive reports directly from CCPs. For example, the London Metal Exchange recently selected us as its trade repository, even though they have a slightly alternative set-up and still use LCH.Clearnet. In general we believe that we are the choice of the CCPs that have no direct affiliation with other trade repositories in terms of ownership.”


TMDS: Only four TRs were approved in first tranche by ESMA – what effect has this had on the competitive landscape and what effect would the addition of more TRs at a later date have?

SM: “We are very comfortable with the competitive environment. The thing we really care about is freedom of choice, something that we don’t think we’ve seen much of in the U.S. A CCP or a SEF, in effect, can dictate where a party has to perform its reporting. We don’t agree with that and believe that the party that has a reporting obligation also has a choice in fulfilling that obligation. The European rules support that view, so we’re very comfortable there. We think that we have a solid reputation and a great level of trust from the industry that will attract customers. Competition is a positive from a user perspective and if one sector of the industry has different needs from others, then it can have those needs addressed in a way that is most appropriate for it. Our aim is to facilitate a reporting obligation for all of our clients.”


TMDS: Europe has gone down the competition route with trade reporting, where other regulators haven’t. What differences does this change in approach bring?

SM: “We’re currently the only licensed repository in Japan and Singapore. In Australia we operate under a regime called Prescription and we’re the repository that firms use. It’s not quite the same situation as us being the only approved repository. These jurisdictions are all open to others, but other repositories will need to see a business proposition that they can take on. The reason that we can make a business out of it is because we have built a global business and can offer economies of scale as well as help firms that have reporting obligations in multiple jurisdictions.”


TMDS: Interoperability is a big issue in Europe with the need to reconcile data between TRs. How is that process working out?

SM: “If we receive one side of the trade, we are required to try and reconcile that with the other side and with another trade repository. We’ve worked with five other repositories to work through a method and a protocol to best achieve this. In effect, at the end of T+1 we will all determine all those trades for which we only have one side, publish that list internally with the other repositories and there’s a method in place whereby each of us can say where we need more information from another trade repository based upon these published lists. We can reconcile that data with the other trade repository and report back to our client and let them know of any discrepancies in the data.”


TMDS: Are your European clients ready to backload their data to 16 August 2012?

SM: “I think this area is a little bit difficult for everybody. There is quite an extended period to do all of the backloading, though: the go-live is 12 February, then there is 90 days to backload all of the open, or live, positions and then there is three years to backload all of the historical, expired trades. There is a lot of work for clients to do and it all relates back to the actual reporting requirement with the inclusion of things like unique IDs. Many are having to add these retrospectively and, in some cases, create them. There’s a lot of data that needs to be captured that, on a forward looking basis, clients now know needs to be captured.”


TMDS: Do you think the reporting mandate poses a particular problem for smaller corporates?

SM: “There are many different levels within the group of smaller agents and there are also many agents who are trying to help. There are software providers, middleware providers, IT solutions, connectivity providers, banks, fund administrators: there is a lot out there in the market. That in itself is, I think, a little bit overwhelming. It’s a very complex landscape. A lot of banks, particularly those that deal with very small corporate clients, are realising that these customers do need help because they trade relatively infrequently and do so for risk management or hedging purposes. The banks are going to have to help them because they can’t do this directly as they are just too far from the financial market infrastructure. It would be a huge step for these companies to start dealing with trade repositories when they have only really ever dealt with their local bank.”


TMDS: Do you anticipate/expect any more delays to the implementation of trade reporting in Europe?

SM: “12 February is the implementation date, but the question is more around the action that the National Competent Authorities will take in enforcing the regime. I can’t see that date moving, but regulators may devise a way of working with reporting parties to give them some concession and flexibility to get it right. There is still work on-going at ESMA around the final guidelines, especially around the reporting of ETD transactions where they had asked for a postponement, so the sooner those come to market the easier for firms to plan for compliance. A lot of firms have coded their reporting of ETD transactions, so a lot will come down to their ability to handle change. If changes in the guidelines are material, it could create another challenge for firms.”

Tags: Trade RepositoriesDTCCEMIRESMARegulation