The recent announcement by ESMA (European Securities and Markets Authority) as to the identity of the first four trade repositories in Europe has brought some much needed clarity to the market. Trade reporting is central to the market reforms that are being implemented globally in the wake of the post-2007 financial crises and, for the time being at least, DTCC, KDPW, REGIS-TR and UnaVista have been chosen to provide increased transparency in the European OTC and ETD markets.
The announcement of the first four repositories is just the first step. There are still issues to be ironed out before the reporting mandate can go live, as planned and outlined on ESMA’s EMIR (European Market and Infrastructure Regulation) indicative timeline on 12 February 2014. Still, after a few delays in ironing out background issues such as repository interoperability and the applications themselves, there is at least now clarity as to who market participants can report to.
“It’s a major milestone. Getting ESMA’s approval is conditional of launching any service into the market, so it’s a huge tick in the box in terms of that part of our project,” says Mark Husler, CEO of UnaVista. “There is still, however, a lot of work to be done and there are a lot of things going on in parallel. There are still a number areas for ESMA to provide clarity on, in terms of the Q&A process. We are expecting further information from ESMA around some of the more technical points and we also need further clarification on areas such as unique trade IDs, some of the trading scenarios and their reporting. There is still more clarity needed that will require some changes to our specifications. Customers are waiting on finalised documentation so we’ve got to try and work with ESMA on that as much as possible. This is one of the most important work-streams that we are facing.”
As well as working with the regulator, UnaVista also has a lot of work to do in on-boarding clients ahead of the reporting mandate going live. “Our test environment has been available for a while now, so that’s something that clients have been using to start testing the process and get themselves familiar with the application,” says Mark. “Also, they need to ensure that they are ready to submit the right data. This is another busy area for us, helping clients ready themselves for the start of reporting.
“Also the sales team are, as you can imagine, very busy, too. There has been a definite increase in the number of enquiries that we have been receiving since the announcement that we have been approved to act as a trade repository. These are our main areas of concern right now, working with the regulator and clients to finalise the process ahead of the start date.”
With further clarity as to the trade reporting having come from the European Commission, the trade repositories can now work with clients across the board. ESMA had requested that the reporting of exchange traded derivatives be delayed until January 2015 to allow more time for market participants to prepare the best way to report this data. This request was rejected by the EC and ETD reporting will commence alongside OTC reporting.
“Our view is that we were ready and will be ready, for February,” says Mark of ESMA’s ETD request. “Whether an instrument is exchange traded or OTC, from our system’s perspective, it’s not such a major issue in terms of delaying a regime. The grounds for ESMA’s request, I believe, were not so much about the readiness of the trade repositories but were more through their canvassing of trade bodies, firms and national competent authorities, that they came to a conclusion that a delay was necessary for the industry. The EC didn’t agree and we’re going live in February.”
The whole process of trade reporting has, at times, been subject to delays. Is there a prospect of further delays to the process? “No, we really believe that the target date of 12 February will be met,”says Mark, unequivocally. “There are a number of areas that require more clarity, so we have to assume that ESMA will provide this and on the assumption that everything is cleared up, I can’t envisage any further delays.”
One area that has contributed to the delays in the introduction of the mandate has been the topic of data reconciliation and interoperability between the repositories to achieve this. There have been several meetings behind the scenes involving the repository applicants and that process in on-going. “The trade repositories can all build systems and processes, and UnaVista was created as a reconciliation system, so it’s what we do for a living,” adds Mark. “But we have to agree as a group, with ESMA, how the reconciliation process between the repositories will work.”
The approval of four applicants out of seven has shaped the competitive landscape in Europe now. Unlike other regulators, noticeably in Asia, ESMA opted against creating a regulatory monopoly and appointing a single trade repository. “I don’t know about the applications and readiness of any of the others. Our focus has always been on providing a flexible technology process as we are a MiFID Approved Reporting Mechanism (ARM) and provide regulatory solutions around other aspects such as REMIT, short-selling and AIFMD,” says Mark on the subject of the competitive landscape in Europe. “UnaVista is well suited to clients who have to deal with multiple regulations and are looking for a flexible technical solution that allows them to on-board quickly via data transformation. Clients value using the same numbering agency for the allocation of LEIs, ISINs etc, so our value proposition is, I think, quite unique. There may well be increased competition in the space in the future, but we are very confident in our value proposition.”
As well as acting as a trade repository, UnaVista has another crucial role to play in the trade reporting landscape in its role as a pre-LOU. This means that UnaVista is one of 14 centres globally, that can assign LEIs (legal entity identifiers) to market participants. LEIs will be used to identify counterparties to each trade. “We are live now. ROC (Regulatory Oversight Committee) has authorised LSE as a pre-LOU for the allocation of LEIs. We have the ROC and FCA (Financial Conduct Authority) endorsements, the global requirement in there, too, so we can offer a solution outside of the jurisdiction in which we are based. In the first two months of our LEI operation we allocated codes in 6 continents. We have a global obligation to provide these codes and reference data. As a result of this, market participants need to get a code regardless of whether or not there is a pre-LOU in their jurisdiction, as we can allocate LEIs globally.”
Two of the four repositories are pre-LOUs, as KDPW has also been afforded that status by the ROC. “We have to keep the repository service segregated from the LEI service to be compliant with ESMA,” explains Mark. “We are able, as an organisation, to service clients for a number of different requirements through UnaVista’s interface, and this is very helpful for our customer service. It is useful for clients to be able to come to us and receive a range of services.”
The range of services that UnaVista provides is all part of its value added offering to clients in the trade reporting space. “We have had a lot of interest and sign ups to the Rules Engine,” says Mark of UnaVista’s flexible technology solution. “It allows clients to submit information under EMIR, MiFID and REMIT, for example. We can assist with the data transformation process to structure it correctly to satisfy these reporting obligations. It has been highly successful in helping clients get their data into the right structure. We anticipate selling a lot more of this solution before February, particularly amongst companies that are perhaps struggling to get their data into the right format.
“That’s a standalone solution that we offer. We also value the partnerships that we have in place. We are one solution in the market place; we are not the only solution provider. Where clients have selected an in-house or external software solution for areas such as middleware or data transformation or collateral management or portfolio recognition, whatever the nature of their landscape of providers looks like, then we have a very clear policy that we will connect to any of those providers. Those providers of upstream systems that feed into trade repositories are all able to connect to us on behalf of their clients. This entails a different commercial proposition, but in simple terms we either allow the data provider to connect to us free of charge and we have a contract with their clients, or we can set up a subscription for the data provider where we have a commercial relationship with them, rather than their client. We also offer customers the opportunity to provide full and partial delegated reporting on behalf of their clients. ”
Everything is falling into place around the European trade reporting mandate, although one or two issues remain to be ironed out, not least from the regulators in terms of updated Q&As and further clarity as to some technical standards. The language on ESMA’s website around the reporting start date of 12 February 2014 has changed from ‘earliest possible’ to ‘known’. The focus is now on determining the final definitions and getting the market ready to commence reporting on schedule.
“The awareness is there,” says Mark. “There has been a lot of information from regulators, a lot of articles in the press and a lot of industry groups have been raising awareness, too. We haven’t encountered firms that are not aware of it, anyway. The next challenge is in the detail. Firms know of their obligations and the timeline and every firm I’ve spoken to has a formal project in place to capture the relevant data and subscribe to third-party providers such as our own in the Rules Engine to create the data.
“I think the area in terms of readiness that needs to be refined is with the trading scenarios, with clarity needed from ESMA There is a risk of change.” One other issue facing market participants is the back-loading of data into trade repositories dating back to August 2012. “It’s a regulatory requirement, so providing this data is imperative. Organisations are looking through their historical archives and trade databases to create this information for back-loading. This will not be straightforward, it is a challenge. Looking back over the archives, through different systems and counterparties is not easy, but organisations are getting this data together because they have to.”
There is, at least, now clarity in the trade reporting space in Europe. Where America, Australia and Japan have gone live already, Europe will be in a position to follow by 12 February next year. Once the announcements are made, the hard work starts. UnaVista and the other three applicants at least have a definitive timeline to work towards now.