RegTech Intelligence 
The implementation of trade and transaction reporting was intended to improve transparency and mitigate systematic risk in the derivatives markets. To achieve this, global leaders have committed to implement standards globally and consistently in a way that ensures a level playing field – reducing market fragmentation and regulatory arbitrage. Whilst progress has been made on the former objective, full realisation of this goal can only be achieved with the full implementation of the latter.
With global regulatory reform high on the agenda for many international institutions, regulators have started working with each other at a multilateral level to better understand and optimise the data being reported – thereby reducing the complex and costly reporting obligations required of market participants. Our previous articles have discussed these problems in detail, as well as some potential bottom-up solutions on behalf of market participants – the merits of constructing a toolbox of industry best practice tools to aid compliance efforts, and the need for a formalisation of stakeholder governance around regulatory data.
In this article, we will examine some of the work currently being done by several regulatory bodies to reduce the burden and complexity of current trade and transaction reporting obligations – plus the implications for the wider markets.
Development from a European perspective
Last year, the European Commission’s DG FISMA (Financial Stability, Financial Services and Capital Markets Union) department consulted the industry on the EU regulatory framework for financial services and used this call for evidence to set the priorities for its Financial Data Standardisation (FDS) project.
The FDS project, performed under the ISA work programme (Interoperability Solutions for European Public Administrations, Businesses and Citizens Programme of the European Commission), sets to create a Framework of Interoperable Standards. These standards will enable efficient reporting of financial data and, thus, improve monitoring of the financial system to allow for better risk assessment by the supervisory authorities at a lower cost to the industry.
Last month, JWG travelled to Brussels to learn more about the Commission’s regulatory objectives and discuss how they might be achieved. Through their consultation, it was clear that the EU has the reporting framework under close scrutiny and is focused on changing the rules of the game by implementing certain principles:
- the “report once” principle that will act to reduce the repetition of common data elements across the reporting process, and;
- the “define once” principle against which the contents of reporting frameworks will be aggregated to create one core regulatory vocabulary used as an overlap control between existing and emerging reporting frameworks.
It was encouraging to find that there is mutual appreciation for the need to address the overlaps, redundancies and inconsistencies across data reporting. However, the main problem, according to DG FSMA, is the lack of a common financial language being used consistently throughout the industry – from the lawyers writing the rules, to those who have the obligation to report. A potential solution to this problem is discussed later in this article.
And there is similar sentiment across the pond …
Last month, the US Commodity Futures Trading Commission (CFTC) also made its intentions clear by publishing a roadmap to achieve high quality swaps data within the over-the-counter (OTC) derivatives markets. The Division of Market Oversight (DMO) has been directed to spearhead the project and ensure the CFTC received accurate, complete and high-quality data for regulatory oversight to streamline reporting obligations.
The focus on data fields from a quality assurance perspective should allow the regulators to perform the necessary oversight functions without the requirement to capture every data point – leading to a more accurate, consistent view of the marketplace to facilitate the efficient detection of market abuse and build-up of systemic risk in the system.
A three-pronged approach has been determined to achieve these objectives:
- Reviewing current swap data repository (SDR) operations (final rules set to be published during Q2 2018)
- Harmonisation of data elements (implementation post-Q1 2018)
- The examination of reporting workflows (final rule set to be published Q4 2018).
The most comprehensive aspect of the regime is the analysis and review of reporting workflows (3). The DMO will seek to streamline workflows by combining and consolidating data into single, clearly defined and electronically reportable data elements. Eliminating multiple reporting streams and the unnecessary duplication of requirements will help clarify what data is actually required and how it should be reported.
A converging approach to reporting – a work in progress
At the heart of this holistic approach to trade and transaction reporting sits the creation of a common reporting tool which harmonises data requirements internationally. Whilst standards on the messaging representation and definitions of key data terms related to derivatives transactions do exist, they are highly fragmented across jurisdictions and regulatory bodies.
As such, the EC have appropriated the first building block in their progress towards standardisation to be the construction of a data dictionary, facilitating clarity in information exchange by ensuring the industry is interpreting the problem in a harmonised way. ESMA is also currently exploring ways through which it can propose certain amendments to the standards under EMIR, potentially aligning the use of the ISO 20022 methodology for reporting, validation and access of data to obligations under MiFIR and SFTR (Securities Financing Transaction Regulation). The use of a single schema for reporting obligations across firms, regulators and trade repositories is the first of its kind, and pertains to an interesting trend in the industry.
Much like the work being done in the EU, ISDA is working with the CFTC to align their product definitions to the Financial products Markup Language (FpML), the predominant messaging standard for over-the-counter (OTC) derivatives, facilitating both the electronic confirmation and electronic reporting of transactions. From here, ISDA plans to collect the data into a common domain model (ISDA CDM) and offer market participants a common representation of fundamental industry processes and concepts. Firms will no longer need to spend time and effort developing their own definitions of basic tasks – rather, they will simply extract the definitions from the CDM and deploy resources elsewhere. ISDA hopes to have developed an initial CDM design by September 2017, laying the groundwork for its wider publication later in 2018.
Considering these developments in the market, JWG’s RegTech Special Interest Group for Reporting and Reference Data (RRDS) is currently in the process of defining how best to scope a workshop to model information and data exchange across the reportable events of a trade lifecycle. The goal is to analyse the full business system in order to determine how well the intentions of the regulation align with what is necessary to detect the risks identified by the trade and transaction obligations, thereby setting the blueprint for any potential technological developments in the future.
Global markets, global regulatory response
Essentially, the first step to solving any problem is acknowledging that it exists. However, whilst it is encouraging to see that there is a mutual appreciation for the need to address the overlaps, redundancies and inconsistencies across data reporting, the true value of these efforts will be realised with regulatory convergence across countries and jurisdictions, therefore, progress should be made to align core economic data fields that are relevant to the primary objectives of trade and transaction reporting – improving transparency, mitigating systematic risk and preventing market abuse.
In this regard, the collaborative effort between CPMI and IOSCO (The Committee on Payments and Market Infrastructures and the Board of the International Organisation of Securities Commissions), to harmonise the definition, forms and mapping of data fields and technical specifications, can be seen as a major step forward. With the CFTC co-chairing, the initiative to set global standards on unique trade identifiers (UTI), unique product identifiers (UPI) and other reportable data elements has garnered strong support from trade associations, such as ISDA, who commend the progress and even proposed a tighter alignment “with the goal of a single industry transition to globally recommended data standards” (ISDA, 2017). Additionally, a move to transaction reporting on a T+1 basis is being explored to align efforts with the SEC (US Securities and Exchange Commission) and ESMA (European Securities and Markets Authority), facilitating the push towards harmonisation.
In our view, the shift in sentiment from the European and American regulators points towards the emergence of a new global trend in the course of financial regulation. With a number of regulatory obligations, such as EMIR, set to come into force during 2018, trade associations and other market participants should combine their efforts and place continual pressure on the relevant bodies to identify exactly what data is required to monitor systematic risk and simplify reporting requirements. Should these trends experience tailwinds in 2018, markets could experience a major re-write in trade and transaction reporting requirements during 2019, aligning standards on a global basis in order to avoid fragmentation and, ultimately, enable greater operating efficiency and increase the quality and transparency of data.
In light of these developments, it is important for stakeholders to continually consult each other on developing the best way forward. JWG’s RegTech Council can facilitate these discussions, and serve as the main channel through which strategic dialogue on regulatory reform implementation is formed.
JWG are here to help
JWG have pooled the expertise of industry SMEs to determine the critical objectives for regulatory reporting and the RRDS problem statement. In the coming weeks, RRDS will continue to examine the challenges faced by the industry and determine how best to position our approach. The next meeting will be held on 24 August 2017 at the FCA and will build on the valuable work already contributed from our established member base.
We are always keen to hear from market participants with expertise in trade and transaction reporting. Please contact RRDS@jwg-it.eu if you would like to get involved. You can also keep up to date with Reporting and Reference Data related news on our LinkedIn Group or follow us on Twitter and subscribe to our newsletter alerts.