EMIR trade reporting “untrustworthy, incomplete and flawed”
Europe’s trade repositories have reported a largely smooth transition, following the deadline under EMIR on 12 February – but behind the scenes deep questions remain about the viability of the European Commission’s ambitious derivatives reform.
EMIR is the European response to the G20 agreement drawn up in Pittsburgh in 2009. The rules essentially state that OTC derivatives must be centrally reported and cleared wherever possible, and traded on an exchange if there is sufficient liquidity.
On the surface, all seemed to go well on 12 February. CME Group reported that the day went well at its European Trade Repository, which received trades from all asset classes, beginning on Tuesday evening. Markit began reporting OTC derivative trades in rates, credit and equities under EMIR using its MarkitServ platform earlier this month, while IntercontinentalExchange, which also runs a trade repository, reported a similar experience.
“Many of our customers have worked tirelessly to prepare for this week’s reporting deadline and we would like to thank them for their efforts and cooperation in working hard to ensure that the first day of reporting occurred seamlessly,” said David Peniket, executive director of ICE Trade Vault Europe, which processed around 4.5 million trades on the first day of reporting via its ICE Trade Vault Europe trade repository. The trades covered energy, agricultural commodities, metals, credit, interest rates and equity derivatives.
However, others took a more critical line, describing the new reporting regime as expensive, ineffective and unrealistic. In particular, the decision of regulator ESMA to publish a Q&A document on February 11, just hours before the rules were due to take effect, was criticised by market observers who felt that the regulatory agenda simply did not give enough time to the market to implement the changes effectively.
“Firms are now scrambling to work out the deltas to their business requirements specifications for how a trade is uniquely identified, what code to use to classify the product and ascertain how frequently multi-leg transaction reporting is required,” said PJ di Giammarino, founder and chief executive of financial services think-tank JWG, in a blog post on 13 February. ” Sound like a few tweaks? We think not. The reality is that the reporting is riddled with deep rooted problems.”
The view that the reporting deadline may have been rushed was tacitly supported by sources close to the situation. Some added that not all sections of the market will be able to comply with the new rules immediately – and that further attention and flexibility may be needed from the regulator. “The industry has tried hard, but trade reporting was never going to be 100% perfect on such a short timeline,” said one source. “ESMA and the European Commission will want to see what they’ve got, and then work out if there are any gaps before they decide what their next move is.”
JWG lambasted both EMIR and the equivalent Dodd-Frank process in the US, on the grounds that the measures being taken are poorly thought-through and implemented and will be unlikely to achieve their original objectives.
One of the chief problems highlighted by JWG is the lack of a reliable, widely accepted legal entity identifier. The argument is that the number of LEIs being issued is far below the level needed to efficiently report OTC derivatives trading activity. The London Stock Exchange, for example, has issued 11,000 LEIs. JWG suggests that the industry may face a shortfall of millions in its LEIs, leading to incomplete and inaccurate data.
“The politicians that gathered in Pittsburgh were quite explicit – they want OTC transparency,” said di Giammarino. “Did they expect that, nearly five years later, we would be pumping billions into creating mountains of information that is so untrustworthy, incomplete and flawed that it is of little value? Everyone now expects that regulators are armed with the information needed to mitigate future systemic risks and protect against market abuse. The reality is light years away from that belief.”
The US rules were identified for criticism at least as much as the European ones. The CFTC has noted that it is currently unable to access reported data in several asset classes – a problem that extends both to the data submitted by the participants and the CFTC’s ability to decode them.
In Europe, the EMIR obligation to clear does not take effect until later this year, after ESMA has released the necessary regulatory technical standards in September.