Some companies are still struggling to comply with the new reporting requirements for derivatives trades in Europe under the European Market Infrastructure Regulation (EMIR), even though a month has passed since the Feb. 12 deadline.
Companies ran into various problems as they prepared to report trades. Some companies encountered delays in getting the legal entity identifier (LEI) they need to start complying with EMIR or in registering with the trade repositories to which they will report their derivatives trades. Even after companies registered with repositories, some experienced technical problems related to the messages used to notify repositories of their trades.
The problems seem to have stemmed from the relatively short amount of time companies had to meet the EMIR deadline and the pressure the compressed timeframe placed on providers like trade repositories.
“There remain significant traffic jams with the various elements of the regulatory infrastructure that it’s just going to take time to work out,” said Luke Zubrod, director of risk and regulatory advisory at Chatham Financial, an advisory and technology solutions provider.
“It can take weeks, sometimes more, to get legal entity identifiers,” Zubrod said. “I talked to someone a few weeks ago who said they were still waiting 28 days in from having applied.”
One of the trade repositories, the Depository Trust and Clearing Corp. (DTCC) is “ground zero” for the EMIR traffic jam, Zubrod said, noting that 80% of the market will be reporting to DTCC.
“We really have no sense of how long it will take for clients who have submitted their [registration] documentation to work their way through the pipeline, but it’s probably measured in weeks,” he said.
Repositories Under Pressure
“It was obvious there was a lot of pressure on the repositories,” said Guenther Peer, regional vice president of solutions consulting EMEA for treasury and risk management software vendor Reval. “The responsiveness of the trade repositories led to delays in the actual process of registration and also in support.”
While some companies are able to do the daily reporting required by EMIR, others still face challenges, Peer said, “mainly around trade repositories’ technology or corporates’ testing and the actual uploading of the messages, and also the technical standards in which the messages are transmitted.”
Martin O’Donovan, deputy policy and technical director at the Association of Corporate Treasurers in London, also cited technical problems encountered by companies that were prepared to comply with EMIR. “The files weren’t being accepted, they couldn’t get through to the trade repositories to find out why,” O’Donovan said. “Some were given login details and found the login wasn’t working.”
O’Donovan noted that “in fairness to providers like the trade repositories, they were only authorized three months before the start date.
“Corporates wouldn’t have signed up with a trade repository before it was authorized,” he said. “Why would you? There was an awful lot to do in three months.”
O’Donovan also noted that while initially there were plans to phase in the reporting of trades, adding each type of derivative separately, the delays resulted in companies facing a single date to start reporting all types of derivatives trades.
“Normally if you’re implementing new systems, you have some test runs and you start with a small amount of your population to test that they really work,” he said. “Going for a single big bang wasn’t that sensible.”
EMIR is Europe’s version of the derivative reporting rules that Dodd-Frank mandates in the U.S. While Dodd-Frank requires only one party to a trade to report, and exempts end users from its requirements, under EMIR the parties on each side of the trade must report and there is no end-user exemption.
Zubrod, pictured at left, said 1.2 million organizations are subject to EMIR reporting in Europe, versus just 1,000 to 2,000 that must report in the U.S. under Dodd-Frank.
Although some companies have yet to comply with the reporting requirement, European regulators are holding fire. (The national securities regulator in each country oversees EMIR compliance, such as the FCA in the U.K. and BaFin in Germany.)
“They’re definitely being tolerant, but being regulators they can’t be too laid back,” O’Donovan said. “They’re now saying, ‘We’ll have a degree of forbearance, but you do need to indicate that you’re working hard on an implementation program.’”
Regulators “made it very clear that corporates cannot lean back and wait and see; they have to focus on getting in compliance,” Peer said.
With the parties on both sides of each trade reporting to repositories, the reports are then supposed to be matched or reconciled. Peer said that so far only a small portion of trades can be reconciled.
The problems reconciling the reports in part reflect the fact that there’s not a single method for companies and financial firms to use to come up with the unique transaction identifier (UTI) for each trade.
The European Securities and Markets Authority (ESMA) issued guidelines on Feb. 11, the eve of the EMIR deadline, for putting together UTIs. The national securities regulators haven’t endorsed those guidelines, though, so market participants are taking various approaches. There’s now an International Swaps and Derivatives Association (ISDA) working group looking at how to construct UTIs.
Peer said that reconciling EMIR reports isn’t a concern for corporates. “Compliance is reached when you have transmitted your derivatives report,” he said.
But Zubrod said it’s possible that the problems with reconciling the trade reports could create work for companies in the future. “Potentially you’ll have to take the UTI that has been generated and update your reporting submission so the UTI your bank reports and the UTI you use match up,” he said.
Meanwhile, companies face additional EMIR deadlines for reporting older trades: Trades entered into before Aug. 16, 2012, that were still outstanding as of the Feb. 12 deadline are to be reported 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 that involves matching the key economic terms and valuation a company has assigned to each swap with those reported by the bank, then reconciling any differences, Zubrod said. “In March, many will have to do this for the first time.”
While the start of EMIR reporting has been problematic, Zubrod doesn’t expect the challenges to discourage companies from using derivatives.
“The real drivers of people choosing not to hedge would be the economic burdens that could feasibly hit derivatives—capital requirements, funding charges, margin requirements,” he said. “The administrative burdens are painful, and it makes this transition from a regulated to an unregulated world a challenge. But they’re not the sort of things that will keep people from managing their risks.”