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As a requirement of the European Market Infrastructure Regulation (EMIR), as of February 12, any entity incorporated in the EU that trades derivatives is obliged to report those transactions to a trade repository (TR) after no more than one day. Six TRs are currently authorized by the European Securities and Markets Authority (ESMA): Regis-TR; the Depository Trust & Clearing Corp. (DTCC); UnaVista, operated by the London Stock Exchange; KDPW; IntercontinentalExchange; and the Chicago Mercantile Exchange. The mandatory reporting date came into effect 90 days after the first TR was authorized, but given the sweeping coverage of the requirement, a mad rush to compliance ensued.
On the day that TR reporting became mandatory for derivatives trades, while most financial institutions managed to report successfully, there were problems. Since then, the situation has been rocky. Between the number of firms that come under EMIR but still have yet to report, or even register for a legal entity identifier (LEI)—an important part of the process—and continuing issues with data quality that are causing trade breaks, reporting in Europe has not proceeded in a smooth fashion, even if the process is steadying for larger financial firms.
Both ESMA and the UK Financial Conduct Authority (FCA), which regulates Europe’s largest derivatives trading region in London, have been lenient in penalizing those firms unable to comply in time with the legislation, either through slow on-boarding at TRs, or problematic launches of delegated reporting services at banks. However, one source at the FCA says this shouldn’t be taken as an excuse, and firms will have to provide evidence that they have pursued every route open to them for compliance before penalties will be waived. Further issues come from the legal structure over what is and isn’t required for reporting. EMIR, as a regulation of the European Parliament and Council, enters national statute books as law. However, the language in EMIR refers to financial instruments as being defined in the Markets in Financial Instruments Directive (Mifid), which, as a directive, is open to interpretation by national financial regulators. This has led to a showdown between the FCA and ESMA over what constitutes a foreign-exchange (FX) instrument that should be reported, and what doesn’t.
Outside of legislative issues over what constitutes certain instruments, however, a lack of regulatory guidance on specific aspects of reporting has led to significant problems. ESMA has defined minimum data requirements to be reported to TRs, which include two sets of data, and can amount to dozens of fields for both reference data and calculated values for each transaction. This has led to multiple reports of poor quality data being submitted to TRs, but one of the key issues for smaller buy-side firms that are subject to the mandate, such as corporates, is the unique transaction identifier (UTI).
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