The politicians that gathered in Pittsburgh were quite explicit – they want OTC transparency. Did they expect that, nearly five years later, we would be pumping billions into creating mountains of information that is so untrustworthy, incomplete and flawed that it is of little value? Doubt it. Did they think Google would come up with a ‘magic box’ to sort this out? Perhaps (God bless them). Did they want to create a lot of IT jobs for the boys – well, not sure they caught that one…
The point is that everyone now expects that regulators are armed with the information needed to mitigate future systemic risks and protect against market abuse. The reality is light years away from that belief.
Just as the EU begins the process of mandatory reporting of derivatives data under EMIR, the US has begun its review of the ongoing swaps reporting process under Dodd-Frank. The results are not particularly pretty. In a 10 February conference call, the 11th Meeting of the Technology Advisory Committee made clear that, while initial progresses in swaps data repository (SDR) reporting have been made, the Commission has “a long way to go” on many reported asset classes, according to Scott O’Malia in his opening address.
Despite an upbeat US perspective, the Commission noted their inability to assess reported data in several asset classes. Issues have been encountered with both the participants’ submissions to the SDRs and the Commission’s ability to make sense of the data from them. Credit default-based asset classes have been the primary focus so far, with interest rate swaps to come, but the IR swaps won’t reasonably be completed until they are required to be cleared on SEFs. While some IR swaps must start clearing on 15 February 2014, the Commission granted a three month extension for most, which means mandatory SEF clearing will not take place until 15 May 2014 at minimum.
On the other side of the pond, while this conference call was in progress, ESMA was getting ready to make it worse. Given that their chosen reporting strategy is exponentially more difficult, few are hopeful for a better outcome. Industry professionals have been scrambling to produce reports with incomplete and shifting requirements for months – although perhaps fewer months than required. They were expecting the inevitable last-minute problems with servers falling over and bugs, but they were not ready for the game to change at 18:00 the day before.
With just hours before the 12 February trade reporting deadline, ESMA released its final round of Q&As for firms before their trade reporting obligations began.
Firms are now scrambling to work out the deltas to their business requirements specifications for how a trade is uniquely identified, what code to use to classify the product and ascertain how frequently multi-leg transaction reporting is required. Sound like a few tweaks? We think not. The reality is that the reporting is riddled with deep rooted problems (see here for our LEI analysis published this week).
The challenge we all now face is that the starting gun has been fired and we have a few hundred thousand people all jogging across a very rocky field. Unlike a year ago, we can’t remap the course without tremendous cost to those that are already panting up the hill. Every time we ask the runners to add another rock to their rucksack, it hurts. Oh, and they can’t stop to figure out where they are going because they’ve been told they need to run forever. If they pull out of the race (or decide not to join it), they become first on the list of suspects and will be named and shamed, at the very least. Not particularly good for business from a number of points of view…
These are serious, expensive and potentially damaging issues that need proper debate. The US has declared that it has problems and is – at least – talking about them. In our coverage last week, we noted that global regulators are throwing up their hands and asking for help as well. We await Europe’s views, but are not hopeful that the dialogue between practitioners and regulators will improve anytime soon.
Will the politicians re-engage and audit what has happened? Will real regulatory leadership emerge? Can the laws be modified and the standards worked out now that the race is on?
The answers are unknown, but, if we don’t find them one way or another, it’ll just get rockier from here.