5 th Proudly celebrating our 5th Anniversary 2010 - 2015 International Securities Services Roundtable EMIR Regulation Nicholas Chaudhry Head of OTC Client Clearing Commerzbank Ph. D. Iwona Sroka President & CEO KDPW and KDPW_CCP Vincent Dessard Senior Regulatory Policy Advisor EFAMA Daniel Jude Chief Operating Officer CME Group Silvano Stagni John Kernan Senior Vice President Regis-TR Group Head of Marketing and Research Hatstand International Securities Services, February 2015 International Securities Services, February 2015 5 th Proudly celebrating our 5th Anniversary 2010 - 2015 EMIR Regulation Brian Bollen and representatives of a cross-section of interested parties gathered together virtually to exchange thoughts on a range of issues arising from EMIR regulation. Brian Bollen: What is the main impact of the EMIR regulations on your area of work? Daniel Jude, CME: CME Group comprising of our Exchanges, Clearing Houses and Repositories is impacted in many ways by the EMIR regulation. In response to the EMIR regulation CME Group has established a European Exchange, Clearing House and an ESMA registered European Trade Repository (CME ETR). Vincent Dessard, EFAMA: From an asset manager’s perspective, there are three major streams of impacts: The first was the mandatory reporting of transaction; the second relates to the cost/benefits analysis of the central clearing; the third is the management of liquidity to provide eligible assets to Clearing Members and to counterparties. Iwona Sroka, KDPW: The KDPW Group, which I represent, includes KDPW as the Polish CSD, and KDPW_CCP as the central counterparty clearing house,. With regards to EMIR, The Polish Financial Supervision Authority (KNF) authorised the KDPW_CCP clearing house in April last year. It should be noted that the Polish clearing house was the third clearing house to be authorised in all of the EU. While KDPW has developed the trade repository service, registered the trade repository with the European Securities and Market Authority (ESMA), and was authorised to assign legal entity identifiers (LEI). Owing to the close cooperation between companies in the group, KDPW_CCP offers free-ofcharge reporting to KDPW_TR; consequently, the reporting of derivatives contracts by KDPW_CCP on behalf of a clearing member or its clients does not involve any additional costs to clearing members other than fees charged by KDPW (for reporting a trade to the repository and for maintaining contract details in the repository). “ From an asset manager’s perspective, there are three major streams of impacts: mandatory reporting, cost/benefits analysis and the management of liquidity. - Vincent Dessard, EFAMA Silvano Stagni, Hatstand: As financial IT consultants we have helped a lot of our clients implement transaction reporting requirements. We have also helped dispel the confused perception that EMIR and similar requirements of title VII of DoddFrank overlapped 100 percent. ” This is to be achieved through the four principal requirements of the regulatory agenda, namely: (i) execution on electronic trading venues; (ii) clearing through central Nicholas Chaudhry, Commerzbank: The fundamental reform of over-the-counter (OTC) derivatives markets is having a profound impact on how these instruments are used. The core objectives of the reforms, which include the Dodd-Frank Wall Street and Consumer Protection Act (the DoddFrank Act) in the US, European Market Infrastructure Regulation (EMIR) and similar measures throughout Asia, are to centralise and manage counterparty credit risk and increase transparency. Commerzbank is a leading international commercial bank with branches and offices in more than 50 countries. The core markets of Commerzbank are Germany and Poland. With the business areas Private Customers, Mittelstandsbank, Corporates & Markets and Central & Eastern Europe, its private customers and corporate clients, as well as institutional investors, profit from a comprehensive portfolio of banking and capital market services. Commerzbank finances more than 30 per cent of Germany’s foreign trade and is the unchallenged leader in financing for SMEs. With its subsidiaries comdirect and Poland’s mBank it owns two of the world’s most innovative online banks. Nicholas Chaudhry Head of OTC Client Clearing Commerzbank Nicholas Chaudhry is Head of OTC Client Clearing at Commerzbank. In his 17 years Capital Market experience he has held senior positions in Fixed Income Prime Brokerage and OTC Client Clearing businesses in Europe and Asia. At Commerzbank Nicholas is responsible for developing OTC Client Clearing solutions and strengthening the product offering to clients. OTC Client Clearing at Commerzbank is focused on delivering tailored solutions to clients looking to address the regulatory requirements that have arisen from both EMIR and Dodd-Frank. OTC Client Clearing is a core component of the new Market Service product solution service which the Bank offers to its clients. International Securities Services, February 2015 counterparties (CCPs); (iii) reporting to trade repositories; and (iv) collateralisation of bilateral derivatives exposures. This has resulted in: significant change in the market structure and transaction processing practices from trade execution to middle or back-office processing and reporting; increased emphasis on real-time processing and STP of trade lifecycle processes along with fully integrated data management and workflows; which impact key elements of business process, operations and technology infrastructure which will in turn require considerable change and enhancement. Brian Bollen: Do you have enough information to properly report on the EMIR regulations? Vincent Dessard Senior Regulatory Policy Advisor EFAMA Vincent Dessard is senior policy advisor at EFAMA. He is in charge of capital markets, capital requirements and risk management related files. Before joining EFAMA in 2011, Vincent spent 6 years in BNP Paribas Investment Partners (previously Fortis Investments) initially setting up its capital markets legislative unit, developing and negotiating its contractual standards rules and integrating this unit into ABN Amro Asset Management and ultimately in BNP Paribas Investment Partners.. He has been the central point legal for the Lehman bankruptcy. He started his career at Euroclear SA where he held different positions e.g. in collateral management. Vincent is a company lawyer, member of Belgian Institute for In-House Lawyers. Vincent has a master in law from the Université Catholique de Louvain. Daniel Jude: CME Clearing Houses (CCPs) - CME INC in the US and CME Clearing Europe in Europe are the holders of master records for CME Markets (Futures & options and OTC Cleared) and therefore we offer a free Delegated Reporting Service (DRS) to all our affected clients to assist them with meeting their EMIR reporting obligation. “ reporting very well, both on its merits, as well as IT. KDPW_TR constantly supports its participants in obtaining an updated knowledge on the possible changes in regulations and guidelines provided by ESMA. Nevertheless there are still practical challenges limiting reporting to all TRs. LEI codes are the basis for EMIR reporting. LEI codes are the basis for EMIR reporting. Therefore the main challenge is the global LEI database which should be reliable and unfortunately is still not. - Iwona Sroka, KDPW & KDPW_CCP CME CCPs continue to receive requests from clients on a weekly basis to switch from their current Delegated Reporting (DR) method via Brokers or middleware to CME DRS. Where a client wishes to benefit from the DRS arrangements, all trades reported via CME CCPs are reported to CME ETR (the CME Group European Trade Repository) and clients can access the submitted data via our web based platform in real time. This enables EMIR reporting counterparties to view and reconcile the data to ensure they are in compliance with their obligation. ” Therefore from the KDPW_TR point of view, the main challenge is the global LEI database which should be reliable and unfortunately is still not. The next important issue is defining field formats. Although the standards to some extent define the reporting of information, the formats of certain fields (in particular numeric fields and data fields) are still not defined clearly enough The harmonisation work in that area is in place and we believe that the quality of data will increase significantly by the end of 2015. CME believes that the Clearing House is best placed to undertake the reporting of futures & options and OTC transactions in a timely, compliant and accurate manner. Other Delegated Reporting solutions can often struggle with the reporting of the valuation and collateral information, CCPs undertake this daily as part of the clearing workflow. Silvano Stagni: We have noticed that most of our clients were already capturing the majority of the data that has to be included in transaction reporting. Some have problems with the availability of data for open trades that have to be backloaded. This is mostly due to some information not being captured at the time when the trade was executed because it was not necessary to do so. Vincent Dessard: EFAMA and its members have been actively exchanging information within members but also with other market actors, this, since the opening of discussion on EMIR. Brian Bollen: What mechanisms are you putting in place to deal with trade reporting for EMIR? Iwona Sroka: Our clients and market participants are prepared for the proper EFAMA is the representative association for the European investment management industry. EFAMA represents through its 26 member associations, 62 corporate members and 24 associate members about EUR 17 trillion in assets under management of which EUR 11 trillion managed by 55,000 investment funds at end September 2014. Over 36,000 of these funds were UCITS (Undertakings for Collective Investments in Transferable Securities) funds. Daniel Jude: The CME Group as stated above has put in place a robust solution to assist clients with meeting their obligations. Whether you trade on our exchanges or clear through our clearing houses CME can alleviate the operational burden of reporting. Vincent Dessard: EFAMA members are dealing with the reporting of transactions in two different ways according to their structure and their strategic approach. They can either handle it in-house treatment or outsource to a service provider or by delegation to their counterparties. Iwona Sroka: KDPW_TR offers its users two communication interfaces: A2A (Application to Application) and U2A (User to Application). A2A is an interface supporting automatic data exchange between the KDPW trade repository application and participant applications. A2A is implemented on the basis of the exchange of standard XML messages via IBM WebSphere MQ. KDPW_ CCP reporting to KDPW_TR uses the A2A system. Nick Chaudhry: Commerzbank has developed in-house solutions for proprietary and client reporting. We have developed reporting obligation and lifecycle events to the swap data repository. We also provide support for new data elements, reference data and identifiers such as trade, product type, entity, event, and collateral portfolio code. CME Group is the world’s leading and most diverse derivatives marketplace, handling 3 billion contracts worth approximately $1 quadrillion annually (on average). The company provides a marketplace for buyers and sellers, bringing together individuals, companies and institutions that need to manage risk or that want to profit by accepting risk. Brian Bollen: Have you seen the EMIR regulations having an impact on the number of OTC trades made? Daniel Jude: It was believed that two of the cornerstones of EMIR would have a detrimental impact on the volumes of OTC transactions. The first is the reporting requirements of EMIR, but as an ESMA-registered TR our public aggregate data available via our website in line with the ESMA requirements show that the volume of transactions continues to remain consistent to volumes prior to the commencement of transaction reporting. The second is the EMIR clearing mandate which is due to commence within the next 12 months. We believe this will have an impact on the proportion of OTC Cleared vs OTC Bilateral. CME Clearing Houses continue to see a switch away from OTC bilateral to OTC cleared as clients begin to voluntarily clear ahead of the EMIR Clearing Mandate and also we are noticing a shift towards Futures & Options (exchange trade derivatives). This, along with the anticipated equivalence of the US and EU derivatives frameworks and recognition of overseas clearing houses, could a see further shift in the OTC derivatives markets from bilateral settlement to central clearing. Iwona Sroka: Owing to the lack of statutory regulations enforcing mandatory CCP clearing of OTC trades and uncertainty as to their final shape, (e.g. restricting mandatory clearing to only four currencies) and implementation deadlines, EMIR has had no impact on these types of transactions. Bearing in mind the profile of the counterparties on the OTC market (i.e. all professional investors), mandatory reporting to the trade repository does not, we believe, have any impact on the number of trades executed on this market. “ This impacts upon the ease with which collateral can be reported on a line-by-line basis. Daniel Jude Chief Operating Officer CME Group Daniel Jude serves as the Chief Operating Officer for CME European Trade Repository, based out of the company’s London office. Since joining CME Group, Daniel has been heavily involved in the development of CME Trade Repository and the application for authorisation submitted to ESMA. He covers the CME Swap Data Repository in the US, CME European Trade Repository in Europe, CME Canadian Trade Repository in Manitoba, Quebec and Ontario and more recently CMEs application to become a Registered Reporting Mechanism under REMIT. Prior to joining CME Group, Daniel gained more than 10 years financial services industry experience. He has worked for RBS IB, UBS IB and MarkitSERV, specialising in FX, Rates and Credit products. In recent years, Daniel’s main focus was assisting Banks, Hedge Funds, Asset Managers, Commercials and Corporates with their operational readiness for EMIR and DoddFrank. Brian Bollen: What has been the most difficult issue to deal with? Daniel Jude: From a Clearing House perspective the main issue has been around account structures, whether our clearing members have the clients’ accounts in an omnibus vs individual segregated account. CME Clearing Houses continue to see a switch away from OTC bilateral to OTC cleared as clients begin to voluntarily clear ahead of the EMIR Clearing Mandate and also we are noticing a shift towards Futures & Options. - Daniel Jude, CME Group ” Iwona Sroka: Short deadlines to implement changes. And also the differences in interpretation of regulations and guides for reporting by market participants. Silvano Stagni: A lot of our clients mentioned problems with the UPI (Unique Product Identifiers) and the UTI (Unique Trade Identifier). The lack of a universally accepted model, like the LEI, has created a level of confusion that will be reflected in the aggregation of trades and the repository reporting of aggregated results to regulators Nick Chaudhry: Article 39 - Asset Segregation. In the transition to centralised clearing for OTC and exchange-traded derivatives, differences are being picked up on in the respective regimes being rolled out in Europe (European Market Infrastructure Regulation (EMIR)), and in the US (the DoddFrank Act). One of the biggest differences is the client segregation models required by each. While the US has chosen to focus on a Legally Separated, Operationally CoMingled (LSOC) approach, the European regulator (ESMA) has stipulated that a Central Counterparty (CCP) can only be re-authorised under EMIR if it can offer a choice of both omnibus and individual asset segregation structures. This condition represents a major difference in the two regimes, and is raising issues for global CCPs. Closer to home, it’s also creating additional workload for clients to understand the capital, funding and operational cost associated with each segregation model before deciding which type they wish to use. Brian Bollen: Do you think regulators are ready to begin assessing the data that has been provided? Daniel Jude: CME ETR has many National International Securities Services, February 2015 Competent Authorities registered to receive the data submitted by counterparties and they have begun to start asking questions around the data that we have supplied to them. KDPW is the central institution responsible for the management and supervision of the depository-settlement system in relation to trading in financial instruments in Poland. Trading takes place according to the highest international standards, including total securities dematerialisation. The Polish central securities depository was created in 1991 as a department of the Warsaw Stock Exchange. On 7 November 1994, this department was removed from the organisational structure of the Warsaw Stock Exchange and since then, KDPW has been functioning as a separate and independent joint stock company, with the State Treasury, as represented by the Minister of the State Treasury, the Warsaw Stock Exchange and the National Bank of Poland each holding 1/3 of shares. Vincent Dessard: Taking into account the impressive amount of work allocated at the treatment of replies to consultations, we are confident that the regulators are either already assessing the data provided or are preparing the final push to start assessing those data actively. Iwona Sroka: KDPW_TR is in constant contact with UE Regulators which obtain the data held in our repository via our communication interfaces. However, in our opinion, even if Regulators are ready to begin assessing the data, they are unfortunately not able to do so accurately. There is still a lot of work to increase the consistency and reliability of TR data (such as data field formats, global LEI database, UTI and UPI standard). Furthermore, individuals who “ - Vincent Dessard, EFAMA Silvano Stagni: Not yet, I think they are gearing up to it by recruiting the right people and putting the relevant infrastructure in place. Educated at the Warsaw School of Economics, where she obtained her Ph.D. in Economics. In 2001-2009 with the Warsaw Stock Exchange as Advisor to the Management Board and then Director of the Market Communication Department. Member of the Board of Directors of the European Central Securities Depositories Association (ECSDA), Member of the Payment System Council at the National Bank of Poland. Nick Chaudhry: Shortfall or not, the issues regarding collateral management remain and the implications for both buy- and sellside participants in the derivatives market will be far-reaching. Collateral management, largely an afterthought in the less regulated environment, will become an imperative and unless firms take measures to streamline the process and mitigate the impact of the new regulations, it will consume time and resources and potentially impact profitability. Considering the cost and resource allocation, the ability of buy-side firms to do this in-house in a scalable way is difficult to determine. From an asset manager’s perspective, as we are third-parties to the clearing arrangements, our most important risks sit with the Clearing Members. carry out business activities cannot obtain LEI codes. This legal form of business activity is very popular in Poland and in our opinion it has had an impact on onboarding new reporting entities and the quality of data, thus on the assessment. KDPW_TR is waiting for the ROC decision in this respect. Ph. D. Iwona Sroka President & CEO KDPW and KDPW_CCP Silvano Stagni: Nowadays most sellside companies are netting their position on a daily basis, so there is little need for collateral. The main risk will come from non-financial counterparties and those buy-side institutions that do take positions. However, the initial reaction to the apparent complexity and the need for collateral overstated the issue. Brian Bollen: The possibility of a collateral shortfall seems to have been pretty much exposed as a bit of a red herring in recent months. Would you agree that the initial hysterical forecasts were vastly overdone? Or do risks persist that we ought to take into consideration? Daniel Jude: EFAMA said, and we maintain this position, that a global shortfall is not really a risk. What we see is a risk of issues in the delivery of eligible collateral. The problem is even more important to asset managers because they might not have eligible assets in their portfolio to deliver to their counterparties and would need to transform it into eligible asset (that would have to remain in line with the requirements in the prospectus), or they do not have access to credit and are forced to use the assets collected according to their prospectus. ” Brian Bollen: Have there been enough safeguards put in place to cope with a CCP or Clearing member that needs to default? Vincent Dessard: EFAMA members have worked extensively to ensure that their process and risk monitoring tools are in place. From an asset manager’s perspective, as we are third-parties to the clearing arrangements, our most important risks sit with the Clearing Members. The second level of issue might come from some legal uncertainties (e.g. the treatment of conflicting situation such as a broker that is also a CM and that is defaulting on the bilateral but cannot be called in default from a CCP’s perspective). Iwona Sroka: The safeguards defined in EMIR relating to the default of the CCP or clearing member, and put in place by the CCP, is deemed sufficient if they can be shown to be effective on the basis of local law. There may be certain exceptional situations (e.g. porting in instances where a foreign participant defaults) where the provisions of EMIR may prove not entirely effective owing to the specific regulations governing bankruptcy law in a given jurisdiction. Silvano Stagni: Reading the rules would make you think so. This does not mean that it won’t happen. It all depends on how effective the implementation of those rules will be. International Securities Services, February 2015 Brian Bollen: What has been the impact on an operational level in terms of numbers of staff and training of staff to deal with EMIR within your organisation? Iwona Sroka: Following the introduction of new EMIR requirements, we needed to make some changes at the organisational level of the KDPW Group. This consisted of moving “ Clearly there is more work to be done on this subject, but I believe the market is engaged and moving towards a solution. Brian Bollen: When do you realistically think the first wave of assessment will be? Vincent Dessard: We believe that the assessment will go in two directions, each Issues not yet clarified are indirect clearing, interplay between EMIR and CRR. Moreover, the elephant in the room is cross-border equivalence, specially between the US and Europe. - Nick Chaudhry, Commerzbank some staff to perform duties involving services arising directly from the provisions of EMIR. Owing to the wide-ranging changes introduced by EMIR and other EU regulations and directives governing the financial market, training is a necessity and permanently ongoing. It is also worth underlining that KDPW_TR and KDPW_CCP have both separately organised a range of training seminars and meetings with market participants and national regulators aimed at instructing the Polish capital market, in its broadest sense, about new responsibilities and obligations being imposed as a result of EMIR. Active participation in conferences, training seminars, high-level international meetings and an individual approach to clients requires the non-stop engagement of KDPW Group staff in the development of services and in raising the quality and accuracy of data reported. ” having different time lines. One, regulatory assessment that should come by end of Q2 2015. Two, internal assessment of both the internal impacts but also of the services provided by CMs that might start a year to 18 months after first implementation by the company. Iwona Sroka: Taking into consideration the harmonization work which is pending we assume that the first assessment should Silvano Stagni: As far as reporting to repositories is concerned, it will probably be towards the end of 2015. ESMA is currently reviewing the fields to include in transaction reporting to repositories. The first wave of assessment will be a few months after the amendments to transaction reporting will be implemented. Brian Bollen: Is EMIR implementation proceeding as smoothly as official bodies like the FCA would have us believe, or is it encountering unexpected speed bumps? Do you see any possible complications as it continues? Are there any unexpected delays happening, and if so, where in the system are they? What needs to be done to overcome the issue? Vincent Dessard: As above, we believe that the regulators have done amazing work Hatstand is a global financial IT consultancy, with offices in London, Geneva, Dubai, New York, Hong Kong and Singapore. We enable our clients to make the best use of technology, delivering flexible and valuable solutions to address the diverse challenges of the highly dynamic financial technology environment. We focus specifically, but not exclusively, on Trading Systems, Market & Client Connectivity, Data Management and Risk, Compliance and Regulation. Nick Chaudhry: This topic has had much focus over the last few months. A report from ISDA recently said, “CCP recovery preferable to resolution”. The report stated three principles. One, “recovery of a CCP is preferable to its closure. As a result, recovery efforts should continue so long as the CCP’s default management process is effective, even if prefunded resources have been exhausted. In the event the default management process hasn’t been effective in re-establishing a matched book – signalled by a failed auction – the CCP may have to consider the closure of the clearing service. At this point, it is likely that resolution authorities will be considering whether this should trigger resolution.” Two, “recovery methods should be clearly defined in clearing service rule books to provide transparency and predictability over the maximum time frame for the default management process before recovery tools are deemed to have failed.” Three, “clearing services should be segregated and structured to be of limited recourse to the clearing provider to mitigate the potential for contagion across other clearing services of the CCP.” start by the end of 2015. It should be also noted that as long as UPI, UTI standards and other work on the quality of data remain unimplemented, an accurate assessment will not be possible. That is why it is difficult to specify a more accurate deadline. Silvano Stagni Group Head of Marketing and Research Hatstand Silvano Stagni: After a long career as Change Director and Strategist for major financial institutions, Silvano decided to focus his professional growth on the Impact of Regulatory Change on IT. His experience in bridging communication gaps between stakeholders is the basis of his style as a consultant and writer. Silvano joined Hatstand in June 2012 and now runs Hatstand’s regulatory practice in London and global thought leadership. Established in 1999, Hatstand has developed from a boutique consultancy into a global IT player, our success placing us both in The Sunday Times Tech Track Top 100 Companies and also the London Stock Exchange’s prestigious “1,000 Companies to Inspire Britain” list. In addition to our proven highly experienced senior consultants, Hatstand nurtures the most talented IT professionals and provides them with bespoke training and mentoring to pursue prosperous careers in the financial industry. We achieve this with our unique talent management programme, Hatstand Green Beret, and through a traditional consultancy model. International Securities Services, February 2015 within that timeframe. However, we are not as optimistic as the FCA seems to be as we noticed (and are convinced that some other regulators would agree), there are some elements that are not as smooth as they could have been: definition of instruments such as forex; a big bang approach for reporting too important to avoid massive reconciliation issue; proposed frontloading “ On December 18 2014 the European Commission informed ESMA of its intention to endorse with amendments the draft RTS on IRS released in October 2014. The proposed amendments impact the RTS in three main “speed bumps”: frontloading, categorisation of investment funds and treatment of nonEU intergroup transactions. The market reaction to OTF (Organised Trading Facility) and to the obligation to trade on-exchange will ultimately require a review of some of the provision of EMIR. - Silvano Stagni, Hatstand mechanisms not taking market reality into account (gratefully corrected by the European Commission in the meantime). Iwona Sroka: The problem we see is the way in which local regulators operate differently depending on their home country. We do not see uniform guidelines on how the authorisation process is to be carried out. Hence the notable differences with respect to how applications are processed. For instance, in determining the first group of currencies to come under the clearing obligation for which technical standards are being drafted, the opinions of some experts relating to the inclusion of a broader range of currencies was not taken into account. Silvano Stagni: Based on conversations with our clients, the implementation of the reporting side of EMIR is proceeding quite smoothly. Detailed central clearing technical standards for specific asset classes are slow in coming and this makes it difficult to plan their implementation. Nick Chaudhry: EMIR implementation is proceeding but there are delays. The first CCP to be re-authorised under EMIR was back in March 2014. In theory the level 1 text allowed for the clearing mandate to be published seven months after. However the first clearing mandate will not be until late 2015, notwithstanding frontloading which comes in to play this spring. ” Other issues not yet clarified are indirect clearing, interplay between EMIR and CRR. Moreover, the elephant in the room is crossborder equivalence, specially between the US and Europe. Brian Bollen: Do you think market participants are ready for the reporting that will be required? Vincent Dessard: We believe that this is an ongoing exercise. To be able to meet the required reporting requirements, the regulators should take into account implementation time required to adapt the IT systems and also adapt prospectuses (which may take even more time, taking into account the approval process to follow with the NCAs). Silvano Stagni: Reporting to transaction repositories became effective almost a year ago. Larger financial institutions are ready, the sell-side is almost ready. Smaller buy-side institution are counting on the sell-side to report on their behalf and many companies are providing that service. This, however, is going to change once the ESMA review of the reporting technical standards has been approved because those changes will have to be implemented. ESMA is an independent EU Authority that contributes to safeguarding the stability of the European Union’s financial system by ensuring the integrity, transparency, efficiency and orderly functioning of securities markets, as well as enhancing investor protection. In particular, ESMA fosters supervisory convergence both amongst securities regulators, and across financial sectors by working closely with the other European Supervisory Authorities competent in the field of banking (EBA), and insurance and occupational pensions (EIOPA). operational readiness for EMIR and Dodd-Frank. Brian Bollen: Will we need to wait until Mifid II is implemented before EMIR can fully come into force? Vincent Dessard: The reply to this question is complex. On the one hand, EMIR could be fully applied to Reporting, Margin requirement and Clearable instruments as defined by ESMA and through recognised CCPs. For this part, MiFID II is not needed. On the other hand, the consolidated tape regime and trading obligation for derivatives have to wait for MiFID II. Consequently, we believe that this question cannot currently receive a straightforward reply. Iwona Sroka: If we consider only the reporting segment, it is not necessary to wait for MIFID II because EMIR regulations related directly to transaction reporting have already come into force. Silvano Stagni: EMIR only addresses posttrade actions; pre-trade and trade issues are addressed in MiFID II/MiFIR. I think that the market reaction to OTF (Organised Trading Facility) and to the obligation to trade onexchange will ultimately require a review of some of the provision of EMIR as it will increase the number of derivatives traded on exchange and the overall volumes of exchange trades compared to non-exchange trades and non-liquid OTCs. Nick Chaudhry: Certain elements of EMIR need to be addressed now by sell- and buyside firms. The general consensus in the market is, start to prepare for the onset of mandatory clearing now and not using the “ We have little to add to the International Securities Services roundtable as the key points have already been made with some eloquence by participants. We would, however, like to draw the attention of readers to documents published by ESMA which advance the clearing and derivatives agenda some degree. The consultation on the “Review of the technical standards on reporting under Article 9 of EMIR”, for example, closed in early February, which means that the feedback received will now be used to form ESMA’s final view on the matter later this year. In addition, we have submitted an amended standard for IRS clearing to the European Commission, moving the actual start of clearing closer. We are also currently consulting on the implementation details of MiFID II, which will also clearly have an impact upon derivatives markets and market participants. - Reemt Seibel, ESMA ” fully phase in periods defined in the IRS RTS. There are two main drivers for this. One, clearing broker capacity - currently there is capacity in the market for clearing brokers to provide clearing services and onboard clients. However this capacity is not infinite and is reducing over the short term, which will lead to bottlenecks in the market. From the end-user perspective the longer they wait the harder it will become to obtain OTC clearing services and have certainty that they can satisfy their EMIR Clearing obligations. Two, pricing - This is clearly linked to capacity and as the capacity runs out of the market, pricing of Clearing services will increase for late arrivals. Which could easily outstrip costs of starting the process early next 2015. The onset of MiFID II does indeed bring further challenges. As such it is important to get in front of EMIR in terms of clearing obligations, collateral management and reporting requirements and leave time to prepare for electronic trading venues and multiple OTF/MTF connectivity. Brian Bollen: What can companies be doing now to make sure that when assessment is conducted, that their data will be accepted? Vincent Dessard: We believe that most (if not all) asset managers are already informed of their duties in terms of reporting (or at least that reporting is required) and setting up their systems in accordance with the regulatory evolution. We would then insist on the need to watch for regulatory changes, exchange views within the scope of local or European trade bodies or directly with peers to ensure that any new rules is understood both by the regulators and the market actors. Iwona Sroka: Market participants covered by EMIR’s reporting obligation have to report in accordance with the technical standards and ESMA guidelines (set out in the Q&A published by ESMA). In particular, they must report on time. They should also reconcile reports with the transaction counterparty and respond to TR messages which provide information about errors. In case of any doubts on correct reporting obligated companies should consult ESMA or the TR to which they are reporting. Silvano Stagni: In order to provide a reliable aggregated scenario to regulators and Brian Bollen is a vastly experienced financial journalist, who has spent his entire professional life observing and writing about the international institutional finance industry,on subjects ranging from the Latin American debt crises of the mid-1980s to the emergence of direct debt as an asset class. Brian Bollen Consulting Editor International Securities Services Magazine relevant competent authorities data has to be correct from the beginning. Companies can reassure regulators only by a level of self-assessment. This self-assessment process could be made more credible if it is performed by an external unbiased body. Brian Bollen: Thank you everyone for your time and patience. Is there anything further you would like to add that we have perhaps overlooked, which might be addressed in a similar future discussion? Nick Chaudhry: Is there an argument for some sort of utility that supports market participants in fulfilling their regulatory obligations? Collateral would seem to be a key element to the cost question; how will collateral management/transformation play into the cost mix? What are the unintended consequences? What are we dealing with now (and in the future) that the regulators have not foreseen? What additional complexity will MIFID II add to the cost debate? Cross-border implementation issues: how do global regulators solve these and provide clarity to the market? Brian Bollen MA (Hons), Fellow of ifs University College Freelance Journalist: Writer, Editor, Media Consultant & Media Trainer He has been a full-time freelance journalist since January 22 1993, when he left the Financial Times building at Number One Southwark Bridge for the last time, after more than eight years as a full-time writer, executive editor and editor within the FT Group. Owner, Author and Editor of Brian Bollen’s Blog (www.brianbollen.com) He passed his banking exams and was elected an Associate of the Institute of Bankers in July 1983, towards the end of his five-year spell on the Midland Bank International graduate programme and was invested as a Fellow of the ifs School of Finance in March 2007, since upgraded to ifs University College. Tel: 01908 234952 (Int’l: +44 1908 234952) [email protected] (writing, editing, copywriting, ghostwriting and coaching assignments currently being undertaken) http://www.brianbollen.com www.iss-mag.com | +44 0 207 492 1958 | [email protected] International Securities Services, February 2015 5 th Proudly celebrating our 5th Anniversary 2010 - 2015 Making the most of trade reporting data Nearly one year after the EMIR trade reporting start date, we asked John Kernan, SVP at REGIS-TR, a trade repository jointly owned by Clearstream and Iberclear, how the market has embraced the regulatory change and which questions are commonly raised by market participants regarding trade reporting. Back in 2009, the G20 agreed that all standardised contracts should be traded on an exchange or on electronic trading platforms and cleared through central counterparties. Non-centrally cleared contracts would be subject to higher capital requirements and all OTC contracts would be reported to trade repositories. Five years on, the European Market Infrastructure Regulation (EMIR) has been implemented and both Exchange Traded Derivatives (ETD) and over-the-counter (OTC) contracts have been reported to trade repositories for nearly a year. Although the (EMIR) reporting requirement gave rise to six new trade repositories such as REGIS-TR, the European trade repository jointly run by Clearstream and Iberclear, both trade repositories and market participants found ensuring compliance with the regulation challenging. The bumpy road towards EMIR compliance Most financial institutions are impacted by a large number of regulatory changes in addition to EMIR. As a result, they initially have to deploy solutions on a tactical basis to meet the regulatory deadlines only to formulate a long-term strategy at a later date. Many non-financial institutions were not used to operating within these regulatory constraints at all. Implementing an EMIR trade reporting solution in time for February 2014 reporting start date was further complicated by delayed availability of technical specifications, late registration of trade repositories, declined extension requests for ETD reporting and, consequently, a compressed timeframe for implementation. Reporting of collateral and valuation updates was implemented in August 2014 for all financial institutions and large nonfinancial institutions. The market was broadly better prepared than in February. However, changes on data validation rules mandated for1 December challenged all participants both the buy-side and the sell-side. “ Most financial institutions are impacted by a large number of regulatory changes in addition to EMIR. As a result, they initially have to deploy solutions on a tactical basis to meet the regulatory deadlines only to formulate a long-term strategy at a later date. ” ESMA’s open consultation paper currently under discussion presents an opportunity to improve reporting and interpretation of data, while it will almost certainly result in a revision of the current EMIR trade reporting framework. On the face of it, the consultation intends to address shortcomings identified during the first ten months of reporting– the much discussed “soft start” – by introducing improvements to better fulfil the reporting objectives, providing clarification on some data fields and their descriptions and by moving good practice/guidance from their non-binding Q&As into fully ratified standards. “ By consolidating raw data from disparate systems, participants tell us that they are now better able to manage margining requirements and counterparty exposure monitoring. ” There had long been demands in the market for measures such as more prescriptive standards and a greater degree of market consultation. Participants will, however, expect a longer timeframe to implement change than was the case for December’s new validation rules mandated by ESMA which did not leave much time for reviewing technical specifications, developing, testing and implementing. It is worth noting that EMIR is not the only John Kernan Senior Vice President Regis-TR John has spent 20 years in the securities services industry with Chase Manhattan, Deutsche Bank and State Street, before spending five years as SVP for Clearstream’s core custody product management. He assumed responsibility for REGIS-TR product management in January 2014. John has held a number of senior positions in the UK, Ireland and Luxembourg and is currently a member of the ALFI EMIR/OTC Derivatives working group. regulation which mandates trade reporting. MiFID II and the accompanying regulation MiFIR are expected to come into force in 2017. Transaction reporting is a key element of MiFID II which will see additional product types and data fields in scope. The REMIT Implementing Act on market abuse in the wholesale energy markets triggers reporting requirements for standardised contracts on 7 October 2015 and non-standardised contracts on 7 April 2016. The Swiss equivalent of EMIR, FinfraG is expected to enter into force in early 2016. Additionally, Securities Financing Transactions (SFT) are likely to become reportable under shadow banking regulation foreseen for 2016/17. International Securities Services, February 2015 Data consolidation benefits Before EMIR, whether you were a supermarket using derivatives to hedge against changes in your future power consumption requirements, a binary options broker offering retail customers online dealing or a large investment manager using swaps as part of a Liability Driven Investment (LDI) fund strategy, you were unlikely to view trade reporting as a central aspect of your business operations. “ Whilst they may delegate the act of sending the report to the trade repository, the participant themselves remain responsible to their regulator for the timely reporting and accuracy of the data. ” However, during the post-crisis regulatory push, trade reporting was catapulted onto the agenda of almost all market participants. Not everyone was pleased with this development; non-financial institutions argued they were being punished for transgressions within the banking sector. While these concerns may or may not be justified, the mandatory implementation of the reporting regime is bringing certain benefits to participants. By consolidating raw data from disparate systems, participants tell us that they are now better able to manage margining requirements and counterparty exposure monitoring and can also perform broader analysis to realise operational efficiency or identify commercial opportunities. For example, one trader at the EuroFinance corporate treasury conference in Budapest 2014 acknowledged that EMIR and REMIT trade reporting requirements had acted as a catalyst for their firm to use the data for monitoring internal trading activity. Outsourcing vs. in-house reporting Depending on the specificities of the regulation, some of the operational burden of reporting may bedelegatedbe outsourced, but for EMIR a number of institutions using multiple venues and counterparties have found this not to be a fitting solution. Whilst they may delegate the act of sending the report to the trade repository, the participant themselves remain responsible to their regulator for the timely reporting and accuracy of the data. Furthermore, sell-side institutions offering delegated reporting services normally do so on a best endeavours basis, i.e. they do not accept any contractual liability for errors. Buyside institutions will be deterred from delegating reporting by the need of From inception, REGIS-TR had the philosophy that participants should not have to shoehorn the TR reporting model into their existing operational framework. To this end, they have entered into a number of strategic partnerships aimed at providing flexibility. This is one of the reasons why they have so many corporate customers as well as large financial institutions amongst their participants. REGIS-TR is a central trade repository for derivatives transactions across multiple product classes and jurisdictions. The trade repository is open to financial and non-financial institutions, primarily in Europe, and will service all types of derivative contracts in a unique market offering. The registry collects and administers details of transactions reported by its clients to give market participants and regulators an aggregated view of positions in compliance with upcoming regulation. In addition to its core services, REGIS-TR will introduce a number of value-added products including centralised collateral management and third-party exposure valuation services. The company is already progressing well towards its goal of becoming a one-stop-shop for the registration of the full range of derivatives. REGIS-TR is a joint venture launched by the Spanish central securities depository (CSD) Iberclear and Clearstream, an international central securities depository (ICSD). It is incorporated under the law of Luxembourg, where it is headquartered. Its operations are now live. implementing a robust control and oversight mechanism for reporting undertaken on their behalf by multiple counterparties. As a result, they will prefer to report themselves. As the landscape becomes more fragmented with regulatory requirements overlapping but not perfect facsimiles of each other, many market participants are revisiting their reporting solution in order to leverage their data more effectively. For many, this means bringing the trade reporting back inhouse. Some organisations have effectively built their own internal data repository infrastructure to meet the multiple regulatory requirements, others prefer external providers. More than a simple repository Either way, there is an expectation that trade repositories will evolve from simply receiving data to offering practical solutions to ease the burden of regulatory compliance across multiple jurisdictions and to help their participants readily analyse the data. Going forward, REGIS-TR will extend its services to enable participants to send data from multiple platforms on a piecemeal basis, support them in re-modelling the data into the appropriate regulatory templates and then process data packages in accordance with the regulator’s technical standards. Trade repositories that can effectively combine operational flexibility, quality of service, powerful data analytics and a holistic reporting compliance view have the strongest chance of becoming the onestop-shop regulatory reporting solution for their region. While global regulatory goals are common, regional expertise is key to help participants address them. The implementation of EMIR has proven that the reporting requirements differ between regions on multiple levels. REGIS-TR’s focus is firmly on European regulation. How regulators use the data Another frequently raised concern amongst market participants is the question of what regulators are doing with the data, especially the issues surrounding reconciliation have been well documented. The belief that regulators might not be doing much with the data could be perceived as a mitigating factor to timely compliance with the reporting requirements, especially as some participants seem to think the prospect of trade reporting fines is a distant one due to the huge volumes - between reporting start date in February 2014 to the end of 2014, REGIS-TR alone received more than two billion individual trade reports. It is true that a number of data quality issues need to be resolved so that National Competent Authorities (NCAs) can properly identify trades where one counterparty has a reporting obligation but has failed to file “ the UK’s Financial Conduct Authority states non-compliance with the full scope of ESMA as being high on their agenda. ” their corresponding report. However, the expectation that volume and reconciliation differences will prevent NCAs from doing anything at all is surely misplaced. Whilst the NCAs are not at liberty to divulge to the trade repository specifically what they International Securities Services, February 2015 intend to do with the data – it is clear that the level of focus is certainly increasing. In their EMIR supervisory priorities for 2015, the UK’s Financial Conduct Authority states non-compliance with the full scope of ESMA as being high on their agenda. Indeed, it was the first topic mentioned. Germany has formalised this by implementing a law requiring auditors to check German firms’ compliance with EMIR. All financial counterparties will be subject to the new audits, as well as NFCs with more than EUR 100 million notional outstanding in OTC derivative contracts. At recent conferences, other NCAs also indicated that they are indeed checking the data and are having discussions with some of their larger participants concerning the poor quality of some of the more fundamental data being reported, namely, the LEI and the UTI, both of which have been subject to increased levels of validation by the trade repositories at the behest of ESMA. But it is not just compliance with the reporting obligation that the data will be used for. At a derivatives clearing conference in October, a representative from the French markets regulator – Autorité des Marchés Financiers (AMF) – confirmed that they are using data reported under EMIR to probe a case of market abuse. In an interview in 2014, John Tanner of the FCA also confirmed that “anybody who is a prudential regulator will look at individual exposures. Regulators concerned with systemic risk will be looking at the inter-relationships between individual exposures. But that is just a sample of the various uses to which the data will be put.” Data quality issues aside, the data reported may come into its own if another Lehman Brothers type scenario unfolds. One of the many problems with the Lehman Brothers case was that they were estimated to be counterparty to more than 900,000 derivatives contracts worth an estimated notional of more than USD 35 trillion (figures from 2013 Jones Day white paper, ”The European Market Infrastructure Regulation and transparency in the OTC derivatives market”). The lack of centralised reporting requirements resulted in a lack of transparency which, in turn, made it impossible to quickly unpick the complex myriad of Lehman Brothers’ contracts. Much of this value may never be fully transparent, save in the event of another well publicised crisis. EMIR as a catalyst for data supported decision making To conclude, whilst some market participants are still debating about the merits of EMIR trade reporting requirements, the fact remains that EMIR trade reporting is in place and, changes prompted by ESMA consultation paper notwithstanding, its scope is unlikely to fundamentally change. For other participants, the debate has moved on and they are looking into long term, strategic trade reporting solutions. They see EMIR as a catalyst for re-engineering their processes and for consolidating their data to leverage it for a more data-supported decision-making process. Reproduced by permission of Rocket magazine and Clearstream www.iss-mag.com | +44 0 207 492 1958 | [email protected] International Securities Services, February 2015
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