If markets used to be a masquerade, then regulation is rapidly making us lift the masks on all our counterparties. As an example, the time to implement counterparty classification under EMIR has passed. 15 September 2013 was the date by which firms had to have known whether their counterparties were FC, NFC or NFC+, for risk mitigation purposes, and mandatory clearing between FCs and NFCs+ is predicted to begin in March 2014. So the only question is when enforcement will begin.
However, many firms, especially amongst the buy-side and the corporates, are still grappling with this challenge. Andrew Rogan, a policy director in the BBA’s Capital Market and Infrastructure division, was recently quoted as saying: “Many people outside the financial services industry simply aren’t aware that they have to comply with these new regulations. If you don’t comply with EMIR there are real consequences to how a business can use derivatives to protect itself from risk – you may even be shut out of the market completely.”
The nature of the problem means that if you can’t rely on a single source for your counterparty classifications then your costs are going to dramatically increase as you have to maintain multiple systems in parallel. One of these systems is also likely to be a largely manual system of bilateral confirmation, agreeing the counterparty’s classification and EMIR preferences in the same way as you would negotiate a contract. However, this is hugely time consuming, and therefore expensive, because of the amount of manpower required.
The problem is that, though there are solutions out there, no single one has achieved complete saturation of all markets. ISDA obviously has good take-up amongst the sell-side, but its use amongst corporates is limited. Indeed, it is understood that some groups in Europe even went so far as to take a position against signing up to ISDA’s protocol and/or disclosing their status as NFC– vs. NFC+. Therefore, if derivatives brokers want to access the buy-side and corporate market in an efficient way then they will have to look at multiple sources.
In our previous article, we pointed out that closed-field, EMIR-centric utilities aren’t necessarily the only option, and certainly not a complete solution. JWG research tells us that there are over 300 things we will need to know about our counterparties for US/EU regulatory reporting purposes between now and 2015. With this in mind, it’s worth considering more flexible models for sharing counterparty information, some of which already have a significant amount of clients in their database.
Enter NotiFide, which is a counterparty classification and unilateral information tool based on a social media-style model of information sharing. This platform has been widely adopted amongst some of those hard to reach French firms, and so we went to one to ask them what its benefits were.
Radia Krouri, Head of Legal Structuring and Capital Markets at Natixis A.M., one of the largest French asset management houses, told us: “The website allows us to answer several requests from our counterparties in order to comply with EMIR, such as LEI codes, our classification and the name of our selected trade repository. Moreover, the formalities in case of an administrative change affecting Natixis A.M. (e.g. change of name, address, contact information, name of process agent etc.) are greatly simplified on NotiFide’s platform… ” Indeed, by giving to each entity the opportunity – and the responsibility – to handle directly the data it wishes to share, and to amend it on a real-time basis, this model has a unique approach which does not depend on aggregations by third party providers.
Therefore, the level of support for NotiFide, and the flexibility of the platform for communicating different kinds of data (including non-EMIR information) suggests that there is, in many regions, a bias towards established solutions. Thus alliances will have to be made between providers if they are to offer a holistic, cross-jurisdictional solution to counterparty classification and EMIR compliance.
However, it’s not just data sharing solutions in this space. In the past, we have also written a lot about the propagation of KYC data utilities. But, again, the fragmented support amongst the large sell-side for different utilities means that no single one will have all the data necessary to lift all the masks at this masquerade. This makes the case for more collaboration between third party solutions clear, and we see the likelihood of a consolidation between the KYC data utility and counterparty classification tools as very likely in the coming years.