Some companies are still struggling to comply with the newreporting requirements for derivatives trades in Europe under theEuropean Market Infrastructure Regulation (EMIR), even though amonth has passed since the Feb.12 deadline.

Companies ran into various problems as they prepared to reporttrades. Some companies encountered delays in getting the legalentity identifier (LEI) they need to start complying with EMIR orin registering with the trade repositories to which they willreport their derivatives trades. Even after companies registeredwith repositories, some experienced technical problems related tothe messages used to notify repositories of their trades.

The problems seem to have stemmed from the relatively shortamount of time companies had to meet the EMIR deadline and thepressure the compressed timeframe placed on providers like traderepositories.

“There remain significant traffic jams with the various elementsof the regulatory infrastructure that it's just going to take timeto work out,” said Luke Zubrod, director of risk and regulatoryadvisory at ChathamFinancial, an advisory and technology solutions provider.

“It can take weeks, sometimes more, to get legal entityidentifiers,” Zubrod said. “I talked to someone a few weeks ago whosaid they were still waiting 28 days in from having applied.”

One of the trade repositories, the Depository Trust and ClearingCorp. (DTCC) is “ground zero” for the EMIR traffic jam, Zubrodsaid, noting that 80% of the market will be reporting to DTCC.

“We really have no sense of how long it will take for clientswho have submitted their [registration] documentation to work theirway through the pipeline, but it's probably measured in weeks,” hesaid.

Repositories Under Pressure
“It wasobvious there was a lot of pressure on the repositories,” saidGuenther Peer, regional vice president of solutions consulting EMEAfor treasury and risk management software vendor Reval. “The responsiveness of the traderepositories led to delays in the actual process of registrationand also in support.”

While some companies are able to do the daily reporting requiredby EMIR, others still face challenges, Peer said, “mainly aroundtrade repositories' technology or corporates' testing and theactual uploading of the messages, and also the technical standardsin which the messages are transmitted.”

Martin O'Donovan, deputy policy and technical director at theAssociation of CorporateTreasurers in London, also cited technical problems encounteredby companies that were prepared to comply with EMIR. “The filesweren't being accepted, they couldn't get through to the traderepositories to find out why,” O'Donovan said. “Some were givenlogin details and found the login wasn't working.”

O'Donovan noted that “in fairness to providers like the traderepositories, they were only authorized three months before thestart date.

“Corporates wouldn't have signed up with a trade repositorybefore it was authorized,” he said. “Why would you? There was anawful lot to do in three months.”

O'Donovan also noted that while initially there were plans tophase in the reporting of trades, adding each type of derivativeseparately, the delays resulted in companies facing a single dateto start reporting all types of derivatives trades.

“Normally if you're implementing new systems, you have some testruns and you start with a small amount of your population to testthat they really work,” he said. “Going for a single big bangwasn't that sensible.”

Tolerance AmongRegulators
EMIR is Europe's version of the derivativereporting rules that Dodd-Frank mandates in the U.S. WhileDodd-Frank requires only one party to a trade to report, andexempts end users from its requirements, under EMIR the parties oneach side of the trade must report and there is no end-userexemption.

Zubrod, pictured at left, said 1.2million organizations are subject to EMIR reporting in Europe,versus just 1,000 to 2,000 that must report in the U.S. underDodd-Frank.

Although some companies have yet to comply with the reportingrequirement, European regulators are holding fire. (The nationalsecurities regulator in each country oversees EMIR compliance, suchas the FCA in the U.K. and BaFin in Germany.)

“They're definitely being tolerant, but being regulators theycan't be too laid back,” O'Donovan said. “They're now saying,'We'll have a degree of forbearance, but you do need to indicatethat you're working hard on an implementation program.'”

Regulators “made it very clear that corporates cannot lean backand wait and see; they have to focus on getting in compliance,”Peer said.

Reconcilation
With the parties on bothsides of each trade reporting to repositories, the reports are thensupposed to be matched or reconciled. Peer said that so far only asmall portion of trades can be reconciled.

The problems reconciling the reports in part reflect the factthat there's not a single method for companies and financial firmsto use to come up with the unique transaction identifier (UTI) foreach trade.

The European Securities and Markets Authority (ESMA) issuedguidelines on Feb. 11, the eve of the EMIR deadline, for puttingtogether UTIs. The national securities regulators haven't endorsedthose guidelines, though, so market participants are taking variousapproaches. There's now an International Swaps and DerivativesAssociation (ISDA) working group looking at how to constructUTIs.

Peer said that reconciling EMIR reports isn't a concern forcorporates. “Compliance is reached when you have transmitted yourderivatives report,” he said.

But Zubrod said it's possible that the problems with reconcilingthe trade reports could create work for companies in the future.“Potentially you'll have to take the UTI that has been generatedand update your reporting submission so the UTI your bank reportsand the UTI you use match up,” he said.

Meanwhile, companies face additional EMIR deadlines forreporting older trades: Trades entered into before Aug. 16, 2012,that were still outstanding as of the Feb. 12 deadline are to bereported by May 5. Trades that terminated between Aug. 16, 2012,and Feb. 12, 2014, are to be reported by Feb. 12, 2017.

There's also a portfolio-reconciliation requirement thatinvolves matching the key economic terms and valuation a companyhas assigned to each swap with those reported by the bank, thenreconciling any differences, Zubrod said. “In March, many will haveto do this for the first time.”

While the start of EMIR reporting has been problematic, Zubroddoesn't expect the challenges to discourage companies from usingderivatives.

“The real drivers of people choosing not to hedge would be theeconomic burdens that could feasibly hit derivatives—capitalrequirements, funding charges, margin requirements,” he said. “Theadministrative burdens are painful, and it makes this transitionfrom a regulated to an unregulated world a challenge. But they'renot the sort of things that will keep people from managing theirrisks.”