Since the February launch of derivatives trade reporting under EMIR, the European market infrastructure regulation, there have been significant problems with the reconciliation of reports filed by each side to the transactions.
For example, DTCC, which has three-quarters of the European trade repository (TR) market share by volume, recently admitted it can only match 30% of over-the-counter (OTC) derivatives transactions and 3% of exchange-traded derivatives (ETD) transactions that have been sent by market participants to different trade repositories. The problem arises predominantly because of problems with UTIs, unique trade identifier numbers.
A National Law Review article by lawyers from Washington DC-based Covington & Burling says that ESMA plans to direct TRs to send back incomplete transaction reports to counterparties for correction, rather than trying to reconcile them. “This may have significant cost and operational implications for counterparties,” the lawyers say. “The rectified reports will need to be resubmitted within the reporting deadline, ie, by the end of the day following confirmation of the trade.”
Counterparties (in particular, non-fiancial counterparties (NFCs)) are advised:
- To adapt their systems and procedures as a matter of urgency.
- In particular, to ensure they have obtained an LEI and know their counterparty classification.
- To be ready to comply with the obligation to report exposures from 11 August 2014.
- To urgently review their systems and procedures to ensure that transactions can be reported, and that specific people are in charge of collating and transmitting reports to TRs within the legal time limits.
- To decide whether to report transactions themselves or delegate to a third party, in which case they must have the relevant contractual provisions in place.
Exposure rules: August deadline approaches
From 11 August 2014, financial counterparties (FCs) and non-financial counterparties that exceed the clearing threshold (NFC+s) must report the mark-to-market (or mark-to-model) value of any OTC or exchange-traded derivative, whether a trade is collateralised, and the value of the collateral posted, say lawyers from Ropes & Gray. This information must be reported following execution of a trade and, thereafter, following any changes to the previously reported values. Thus, if the value of a trade changes daily, this information must be reported daily.
The National Law Review article by Covington & Burling is available by clicking here.
The Ropes & Gray article is available by clicking here.