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Under the European Market Infrastructure Regulation (EMIR), as well as in reporting rules from the Commodity Futures Trading Commission (CFTC), dealers are required to fill in a number of fields that allow regulators to see identifying information of the counterparty to each trade, including the legal entity identifier (LEI), a 20-character alphanumeric code that is unique to each participant. This is in conflict with privacy laws or banking acts in a number of countries – including China and Switzerland – which forbid the sharing of identifying data with foreign jurisdictions, with fines or prison sentences as punishment.
"Until we can get a clear view from the foreign regulator or the CFTC about what's allowed and what's not, we figured we'll take a more conservative approach and mask identities in any jurisdiction that we deem as problematic to reveal their identity", says a source at one US bank. A regulatory expert at a European dealer says it is also masking identifying information for some customers in "an attempt to respect the EMIR obligations without entering into a conflict of law. I don't think it's a long-term solution, though." The chairman of the European Securities and Markets Authority (ESMA) said masked counterparty data was not acceptable. "There should not be exemptions for reporting the identity of counterparties as this will produce holes in the reported data", he said.
Although some countries allow information to be shared with foreign regulators if consent is obtained, this has proved to be a lot trickier than anticipated. For countries with stricter privacy laws, such as China, Taiwan and Korea, consent has to be obtained from regulators on a trade-by-trade basis. Elsewhere, consent can be provided by the customer on a blanket basis – and the International Swaps and Derivatives Association offers standardised contractual add-ons that enable this consent to be provided – but dealers say customers remain largely in the dark about the issue.
As a result, lawyers anticipate the CFTC will have no choice but to extend its relief and may even make it permanent. "The most likely thing is that they would extend it", says one US-based lawyer with close ties to the CFTC. With no solution currently possible in the EU, the expectation is that the conflict will have to be solved via some kind of equivalence regime, in which ESMA would allow EU-regulated market participants to mask trades if the counterparty's home jurisdiction had its own reporting rules. This is not likely to happen any time soon, says a London-based lawyer: "I think we're talking in terms of years rather than months to get to that equivalent point", she says.
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