With 9 working days to go before compulsory reporting of derivatives trades becomes a daily reality, firms are in the final phases of implementing their individual solutions. These differ from firm-to-firm, for example some are planning to report in real-time (as in the US), while others plan to report later within the T+1 compliance window. However, there are several problems that seem to be affecting the majority of firms.
First up, Awareness. Non-financial institutions trading derivatives (NFCs) still appear to be far less aware of new requirements than regulators expect them to be. Despite concerted outreach efforts, many sell-side institutions report a less than enthusiastic response and are less than confident that they are prepared for compliance on 12 February. This concern would seem to be corroborated by the low number of LEI registrations (which at time of writing is around the 150,000 mark).
Customers not registered for LEIs create problems for sell-side firms offering delegated reporting because reporting without an LEI could potentially make them non-compliant with the ESMA technical standards, and thus a target for enforcement action.
Another problem results from the late breaking differences between what ESMA expects for bilateral (OTC) derivatives contracts vs. contracts concluded over an exchange (ETD). The ESMA Q&A, which came out just before Christmas, introduced a host of new considerations for firms implementing ETD reporting systems (such as the addition of transaction reference numbers, which have to be collected from a third party in addition to the infamous UTI). Finding it too late to implement these new requirements – which at one stage were expected to be delayed – some firms are seeing them as a 2.0 fix, and not something to focus on in their 12 February roll-out.
In addition to all this, the final rules still remain unclear, particularly around the subject of US/EU mutual recognition. The differences between the US and EU rules – realtime vs. t+1 timeframe, single-sided vs. dual-sided reporting – remain a source of headaches for firms trading with both US and EU counterparties. Previous announcements from the CFTC and European Commission promised mutual recognition of aspects of one another’s rules. Mutual recognition would be a significant release for many firms, especially those caught by the two jurisdictions’ tangled web of extraterritoriality rules, because it allows them to become compliant in both jurisdictions by complying with the rules of one. Significantly, were the EU to grant their form of mutual recognition (equivalence) to other jurisdictions, it would greatly open the way for non-EU CCPs and TRs to provide their services to European firms.
However, despite the fact that the rest of the world have implemented rules largely similar to those of the US/EU, neither jurisdiction has recognised the other’s rules. This is partly due to an ongoing trade dispute which goes much deeper than just financial services. The next stage of this discussion will come on 10 March during a week-long meeting of US and EU lawmakers as part of the Transatlantic Trade and Investment Partnership (TTIP) negotiations. If the two jurisdictions do break the deadlock, then many firms (particularly smaller ones) will find themselves with a significantly reduced rulebook, and reduced long term costs, even if they do have to adapt their compliance programmes subsequently. Watch this space…
The question is, given that a number of EMIR deadlines have already passed, and vendors are out in force with EMIR-based solutions, have regulators missed the window to simplify compliance for the markets? As ever, we’re seeing lots of activity in the market infrastructure arena that is purported to solve regulatory problems…
JWG is currently running a series of meetings on the impact of EMIR on the global market infrastructure; our next one will cover TR, CCPs, KYC utilities and delegated reporting offerings. We encourage interested parties to get in touch.