Making sense of data poses challenge for trading firms
Despite efforts to create a more transparent OTC derivatives market, market data costs have increased significantly since 2008 and the industry has very little to show for it, according to senior financial executives speaking at an event organised by FIX Trading Community in London this week.
“Regulation is squeezing the cost base and forcing customer to do more with less,” said one technology vendor. “At the same time, expectations are changing – we’re moving from a world where it takes days to move data from the front to the middle and then to the back office via paper and fax, to a situation where people want it in seconds. That’s a tough order.”
The lack of standardisation was also highlighted as a potential pitfall to the system, with each financial institution reporting its data in a slightly different way. In particular, concerns were raised that regulators would lack the manpower and expertise to fully understand the newly reported data, making the value of the whole reform agenda questionable.
“There’s a dearth of standards for issuers,” said one representative of a major global tier one bank. “Until you call a spade a spade, you’re not going to be able to build the technology to resolve this question to the satisfaction of all parties.”
It has been estimated that around one million LEIs will be needed to fully track trades under the new European Market Infrastructure Regulation which took mandated derivatives trade reporting on 12 February – yet only around 200,000 have yet been issued. Market participants noted that although the date for trade reporting of OTC derivatives under EMIR has passed in Europe, for many the work will continue for years until all issues are fully resolved.
This last point was picked up by a representative from a large global bank, who added that non-compliance could be a problem. “If you don’t have an LEI ready then you have to put in something else to mark the trade,” he said. “ESMA expects an LEI. CCPs in Asia are following that line and requiring LEIs, so in theory if you don’t have one you’re non-compliant. How long will that last? At some point these people are going to find it difficult to trade.”
Other panellists added that governance issues are a major concern, citing questions over the ownership of data, its origins and its quality. One said that the challenge “isn’t sourcing the info … it is choosing which is correct and having confidence that it is based on the latest version of the truth. Trust is critical.”
However, not everyone is satisfied that even a massively expanded LEI regime would be sufficient to bring the level of clarity demanded by regulators and desired by market participants.
“Some people here seem to think the LEI is a panacea to solve everything, but it never can be,” said one panellist. “The LEI will never become the master key for every organisation. We need meta data – that is, data about the data. We need to understand where it came from, how we can use it and whether it is from a reputable source.”
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.