By Jon Watkins, The TRADE.
Regulators are set to clamp down on widespread trade reporting breaches across Europe as a six-month grace period since the rules were introduced expires, according to industry sources.
Issues surrounding unique trade identifiers (UTIs), legal entity identifiers (LEIs) and the complexity of the 85 fields required by regulators have plagued the process from the outset.
As a result, only around 1% of trades have been matched, compromising the objective of increasing transparency in the markets with unusable data.
Experts with knowledge of the matter now believe regulators around Europe could begin handing out fines in an effort to increase the rate of matches, and motivate firms to correctly report their OTC and exchange-traded derivatives transactions.
“There were over 6 billion reports this year and not a lot of them match up so we are fully expecting them to start honing into that particular problem soon,” one source told The TRADE. “And they really have to, in order to make a statement.”
The reporting of trades was one of the four key pillars within the G20 market reforms and began in Europe on 12 February 2014.
With only a last minute Q&A paper for guidance, the market was largely unprepared for the new regulation, forcing regulators to take a soft stance during the initial months.
But their tolerance may be fading, and with MiFID reporting requirements also in the pipeline, national competent authorities such as the UK Financial Conduct Authority (FCA) are ready to act.
“The FCA has not stated anything publicly about when their forbearance on trade reporting will come to an end, but the general feeling in the market is that they start to toughen up their stance after 11 August, which is when collateral and valuation reporting becomes mandatory,” said Richard Wilkinson, director, post-trade solutions, Contango.
“Personally I believe the FCA will want to go after a ‘big fish’ once the gloves come off, rather than sanction a low volume buy-side entity who is trying to make sense of the ESMA Q&As and probably struggling with trying to manage the reconciliation of their books and records with the output from their chosen delegated reporting entity.”
The collateral and valuation reporting requirements add another twist into an already complex scenario.
While firms are more prepared for the deadline, inconsistencies with the entire process mean these extra fields are just going to complicate matters more.
The trade reporting rules were implemented to make the markets safer, but with low matching rates, there is little regulators can conclude from any analysis.
For regulators to fulfill their objectives and justify the rules being put into place, the matching rates need to increase, and their only power lies with financial penalties.
In the hypothetical situation of another company meltdown in the market, regulators would be left accountable for not spotting the signs through the data, which was supposed to be collected in order to counter that risk.
Under article 12 of the European markets infrastructure regulation it is down to each member state to impose fines for breaches of the rules.
The FCA, charged with overseeing the UK’s financial markets, has previously handed out fines over transaction reporting under MiFID, and could be one of the regulators set to take a harsher stance on reporting breaches.
The FCA and the European Securities and Markets Association (ESMA) declined to comment.
“The easiest thing for the FCA or any regulator to do is go after people who don’t report,” said PJ Di Giammarino, CEO of regulatory think-tank JWG.
“You would expect them to start with the easy ones, where one side of the trade is being reported and the other isn’t.
“So in that case it will be like the fines for transaction reporting where the fines will be based on what you did or didn’t do appropriately.”
Sources have also told The TRADE that the German Federal Financial Supervisory Authority (Bafin) has sent the strongest signal yet.
Bafin allegedly warned firms that auditors would not be permitted to sign off their accounts if the firms did not show compliance with derivatives reporting requirements.
Bafin had not issued a response at the time of publication. Firms remain in the dark about how much the fines will actually be, when distributed.
The only authority to clarify the range of a potential charge thus far has been the Italian regulator (Consob), which said it will hand out penalties of between €2,500 and €250,000.
“The regulatory approach differs slightly by jurisdiction, but it is the same theme – we are going to tighten the screw and then over time it becomes more and more difficult to say you are not hearing the message,” added Di Giammarino.
Sources believe the first target for the fines could be major futures commission merchants or broker dealers, with the buy-side likely to escape the initial wave of penalties.
But if the regulators decide to come after those who are not reporting correctly, or even at all, their reach could stretch throughout the markets.