This time next year, the market is going to be a very different place. No-one knows the complete, consolidated impact of regulation on the market, and many of the parts are still in motion, but the core structure is starting to take shape.
In Europe, our research tells us that most institutions are opening 2014 where they left off in 2013: racing to implement systems to report trades to one of (at the moment) six trade repositories before February. Despite the host of regulations coming in 2014, a recent JWG survey found that out of 13 major regulatory implementation projects banks would put an average of 20% of their budget on EMIR, with another 12% on the identifiers required for EMIR reporting. This shows that EMIR is still a major area of spend for firms in Q1 2014.
Firms will be rushing to make and implement a number of decisions before February: Should I delegate my reporting, and if so to whom? Which of my clients will I register for a pre-LEI? With which local operating unit (LOU) should I register? Will I be generating UTIs for all my trades, or will there be some trades where I will have to receive one from my counterparty or a third party? Will I be confirming my counterparty’s status with them bilaterally or via a third party data? And each will be influenced by (as well as influencing) what others are doing, as the industry collectively moves towards a compliant modus operandi.
However, as with all things in regulation, none of this is being decided in a vacuum. Other rules will impact our decision-making: Will your chosen client classification method – bilateral, platform-based or KYC utility – work for other regulations? CRD IV requires the same classifications as EMIR, but MiFID has a whole different set of classifications, which may soon be changed under MiFID II. Similarly, MiFID regulatory reporting is set to be extended to derivatives. How will this affect your implementation of TR reporting under EMIR? Finally, mutual recognition rules are still being drafted in Europe and the US, meaning that the global picture is still very much subject to change.
On Tuesday 21January, JWG will be welcoming representatives from thirteen firms and trade associations to discuss these issues in greater depth, and hopefully identifying areas for further collaboration – between buy-side, sell-side, trade associations and regulators – on reporting standards. Minutes will be made available to JWG members on our Customer Data Management Group site.
But that’s all Q1; what about the rest of the year? Reporting frenzy will quickly be followed by the move to compulsory clearing for certain trades, as soon as ESMA approves a CCP for each underlying asset class. But again, firms will have a number of decisions to make: How will I connect to the CCP; directly or through a clearing member? What segregation models will I offer my clients? What level of segregation will I request for my own assets? How will I optimise my collateral in order to avoid opportunity cost? These kinds of questions are creating what looks like a strong ‘know your product’ drive in Q2.
Again, there are many other regulations to consider here. The UK client assets regime (CASS) is high on several professionals’ worry lists for 2014, in the way it requires firms to tie assets back to individual clients. CRD IV and Solvency II also require firms to look much closer at the quality of their assets and limits what they can be used for. And finally, new rules on shadow banking look likely to limit firms’ ability to reuse assets through securities lending and rehypothecation. How will firms map these requirements to individual assets in order to know how to treat each of them? Again, we will run a number of CDMG meetings on these issues once trade reporting is in, and we encourage firms to look out for these.
A number of other issues will also play into these discussions: The market data landscape is set to be heavily impacted by a number of new initiatives including EMIR, new Benchmark Regulation and the incoming rules relating to data protection and privacy. Similarly, the developing FMI landscape – including new business models and who is authorised to provide what – will also figure into JWG’s analysis over the coming months, to the point where we will be able to provide members with an accurate picture of the options available to them when dealing with these complex decisions under EMIR.