Following one of the Trump administration’s financial executive orders, the US Treasury Department issued a report which calls for regulators to streamline reporting obligations and review their coordination efforts, incorporating greater accountability and clarity into examination procedures and data collection requirements.
The request mirrors commentary from European Central Bank President Mario Draghi, who, during his speech on 25 August 2017, warned how the loosening of financial regulations could re-create incentives that led to the financial crisis. He reaffirms how “regulatory convergence provides the strongest assurance that the playing field is level right across the European market.”
Both announcements elude to an overarching theme which, after years of policy stagnation, has started to gain traction in the approach to trade and transaction regulatory reporting – global regulatory convergence – and, with political pressure calling for reform, regulators are starting to follow suit.
For instance, the European Securities and Markets Authority (ESMA) has published final guidelines establishing a consistent and harmonised approach to the transfer of data between trade repositories (TRs) under the European Market Infrastructure Regulation (EMIR), with the scope of facilitating consistent compliance to the relevant provisions. With 44 billion derivatives reports registered to several Trade Repositories (TRs) during 2016, the guidelines look to provide additional clarification as to ESMA‘s position on data quality, competition between TRs, and risk monitoring – aiding TRs and other participants on the reporting process. The guidelines will become applicable as of 16 October 2017.
Our previous articles have examined similar initiatives currently being rendered by regulatory authorities to reduce the burden of current reporting obligations on market participants. In this article, we will continue to focus on the work being done by other market participants to facilitate reporting capability, thereby elaborating on our central thesis – that the demand for regulatory convergence is currently being met by industry wide collaboration and initiative.
An industry focused on building capability…
The underlying complexity lies not in determining the scope of what should be achieved – movements of this magnitude are often easily realised – but, rather, in the methods employed to achieve it. In our view, the first practical step towards the development of a global regulatory framework requires the market to systematically collaborate, clarify and agree on the definitions and implications of every factor inherent in trade and transaction reporting process – from the technological requirements to potential impacts on the overall business model of firms. The examples below lend support to this presumption.
With several standards across multiple jurisdictions, and distinct technical requirements dependent on a multitude of factors, the Futures Association Industry (FIA) acknowledges the difficulty inherent in attempting to reach a common method across reporting obligations. Their recent paper, published in association with the Intercontinental Exchange (ICE), supplies Investment Firms subject to the reporting obligations of Article 58 of MiFID II with instructions on how to submit their XML formatted Reportable Positions to the ICE each business day. Similarly, other trade associations are currently in the process of specifying what data is required from an Exchange Traded Derivative (ETD) across 60+ trade and transaction scenarios – differentiating between jurisdictions, products and regimes.
With so much of today’s information being computer generated, the language and method of data collection used by European Supervisory Authorities (ESAs) needs to evolve to meet market practice. ESAs need to be empowered with a core reporting capability which is comprised of the three capabilities described in Exhibit 1.
|Exhibit 1: executive summary of JWG’s RRDS recommendations to the European Commission (EC) 16 May 2017|
|Better tools. The EC should prescribe ‘best practice’ supervisory tools||► Align reporting obligations across legislative text via a common reporting rule book and data dictionary
► Define a unified framework for information exchange
► Break down the obligations into bite-sized, easy-to-swallow pieces in a holistic implementation plan
► Do more at the centre to decipher obligations early in the implementation process with 10 new tools
|More reporting discretion. Enhancing ESAs reporting powers||► Define a more complete, and holistic vision of what regulators are trying to achieve with reporting regimes
► Adopt an open source approach to allow the tools used to comply with regulatory obligations to become standards in their own right
► Define a ‘golden source’ of regulatory reference data and become data owners and publishers
► Increase global convergence and the use of industry standards.
|Effective stakeholder engagement. Convening the platform for technical experts||► Bringing IT to the table early on via the creation of an IT/business group
► Enhance the reporting SME engagement across sectors and businesses
► Formalise the regulatory data community by constituting a reporting data group
► Provide a way for the infrastructure to convene
In the same regard, ISDA (International Swaps and Derivatives Association) and Linklater LLD’s whitepaper titled “Smart Contracts and Distributed Ledger – A Legal Perspective” highlights the legal ramifications of “smart contracts” and “distributed ledger technology” (DLT) within the derivates markets. The adoption of such technologies allows for a fundamental remodeling of the derivatives market infrastructure and could reduce operational risks, streamline increasingly cumbersome and time-consuming processes and cut costs – potentially transforming the way derivatives are executed and managed throughout the entire business flow. ISDA’s Market Infrastructure and Technology Oversight Committee (MITOC) is currently overseeing the project, and looks to develop industry wide standards to facilitate the roll-out of these new applications across firms and platforms. However, whilst the use of these technologies offers great potential in terms of reporting efficiency, their application is still nascent. The prevailing view is that DLT and smart contracts will have a meaningful impact on the derivatives industry within the next five years.
Through JWG’s latest Reporting and Reference Data Special Interest Group (RRDS) meeting at the FCA, it was clear how, even after years of preparatory guidance from the regulators, market participants are still struggling to understand exactly what, when and to whom certain data should be reported. Encouragingly, concerns are now being met by initiatives from several firms, including Tier 1 financial institutions and technology vendors. Despite the variations in execution and method, the underlying fundamental scope of each initiative is to clarify today’s issues in reporting obligations. Essentially, each takes a critical view of the existing framework and looks to review several reporting components through detailed analysis, consultation and data convergence. The most significant point raised was that these projects have garnered support from senior management across several firms, increasing the probability of success.
…and therefore, a path forwards
With all the uncertainty inherent in the reporting projects outlined above, it is vital for market participants to continually propose clarifications on all aspects of the reporting process. With this in mind, RRDS is currently in the process of contextualising the domain, model and framework of a derivative business workflow to better understand what information is produced throughout the trade and transaction reporting process. In doing so, stakeholders will be able to determine how well the intentions of the regulation aligns with what is necessary to detect the risks identified by the obligations.
Here at JWG, we recognise the importance of taking a collaborative approach to solving industry problems, which is why 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 6th October 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.