We are close to shutting down EU OTC trading. A mere five work weeks from the EMIR deadline, by which banks must have classified their counterparties in order to reconcile portfolios with them, we have almost reached an impasse. Will the industry mobilise and help your local pig farmer to stay in business by enabling him to continue to hedge against supply risks?
In previous articles (here) we have discussed the difficulties of classifying hundreds of thousands of legal entities into EMIR’s new trading labels. Whether by post, phone, email or website/survey tool, action is required to get a representation from a current client, or trading may have to cease with them. This applies to almost everyone – the sell-side, asset managers AND corporates – so what has been done so far?
The most observable effort to address this issue are the two ISDA EMIR protocols (here and here), agreements which can be signed by financial and non-financial counterparties (NFCs) alike, to give financials certainty as to their counterparties’ status.
Some firms have made their faith in the protocols clear by emailing their clients directly, threatening to stop trading altogether with those who didn’t sign up. However, since then, only one bank has signed up to the NFC protocol, bringing the total number of adherents to 25 – 11 of which are banks. Notably absent from the list are most of the large US G-SIFIs as well as the Spanish, Italians, Nordics and the UK state-owned banks. The story of the second protocol, the portfolio reconciliation one, is similar, with only 22 sign-ups.
Those banks that have paid the €500 to sign up represent a mere 0.3% of the 8500+ credit institutions in the EU, begging the question that if the banks aren’t signing up, why should the corporates? Only a handful of corporates have signed up including Shell, Levi Strauss and Transbulk. Sadly, with what we have so far, there’s not much hope for the pig farmers out there.
The fundamental problem is that we have a huge number of declarations to make, and very little time to do it in. Even making a rather generous assumption that the number of counterparties trading OTC in Europe is a fraction of that in the US, this still leaves us roughly 50,000% short of where we need to be 5 weeks from now.
Clearly, the urgency has not been felt. Why?
We’ve looked to the key trade associations’ education and outreach strategies which attempt to engage the corporates and buy-side and explain the problem to them. Sadly, we turned up very little that gave us an idea of the scale of the problem – certainly the amount of literature is small when compared to the volume on the impact of Dodd-Frank.
Most noticeably, the amount of information addressed directly to the corporate community is negligible. For this kind of information, one would have to go to the website of the FCA, which provides an introduction to EMIR for corporates (here) and a fixed page detailing the obligations of NFCs (here). However, regulators have made it abundantly clear that the onus is on firms to solve the classification problem, and so to expect any more from them in the way of education and outreach would be misplaced.
Perhaps more fundamentally, we have an issue of corporates not knowing who their regulator is for financial services, and thus not having much incentive to care. Add to this the conviction encountered among some corporates that they can just ignore the problem. This is certainly flawed logic, but will no doubt create issues for banks in the short term. Other jurisdictions have decided to issue their own protocols but not make them publicly available – perhaps a logical solution locally, but one difficult to maintain across the European marketplace as NFCs move above and below the clearing thresholds.
What’s worse, even if one finds some information on registration it is likely to reference another contingent regulatory initiative: the Legal Entity Identifier (LEI). A recent ESMA Q&A (here) explained that they expected firms (but not branches or desks) to use LEIs or pre-LEIs when reporting to trade repositories. However, with 9 pre-LOUs now set-up including Ireland, Palestine, Turkey, Russia, France and the Netherlands (and with more in the pipeline), the broader ‘what do I need to do to register, with whom, and by when?’ questions are likely to get lost in the shuffle. This is all the more reason to stop and do nothing until the regulators come knocking.
On the positive side, the Association of Corporate Treasurers (ACT) have taken a relatively active role in promoting the issue to their members, putting out a briefing note (here) informing companies that they will need to register for an LEI as well as signing the ISDA Protocol. Little mention could be found about what to do vis-à-vis continental efforts.
Ultimately what we have is a big disconnect. It is increasingly likely that the kids won’t get their bacon because nobody took charge or thought broadly enough about what the politicians were asking and then worked across silos to get the word out and make this regulation work. Not the first time the industry has failed to demonstrate its common benefit, but perhaps one of the more painful ones.
In the near future, will we move beyond a set of low-profile, fragmented and mixed-messages to a campaign to get to the corporates and raise consciousness to the task at hand? We hope so, but are laying some porcine provisions in the freezer just in case.