FSB highlights trade reporting problems

Shanny Basar

The Financial Stability Board, the international body that monitors the global financial system, said authorities have challenges accessing, using and aggregating trade reporting data.

The FSB said in its ninth progress report on implementing over-the-counter derivatives market reforms that the availability and use of trade repositories and central counterparties continues to expand, particularly for credit and interest rate derivatives.

However the report said: “Challenges, such as authorities’ ability to access, use and aggregate TR data, persist.”

In the EU and US there are three or more TRs are available to accept reports in each asset class while in other jurisdictions there are typically one or two TRs available to accept reports in each asset class.

“Although a TR has been authorised in Turkey, it is not yet accepting transaction reports, while South Africa and Switzerland currently do not have any TR or TR-like entity authorised to accept reports in any asset classes within their jurisdiction,” added the FSB.

The study found that trade reporting is generally higher for OTC interest rate and foreign exchange derivatives, and lowest for OTC commodity derivatives.

“In most FSB member jurisdictions, an estimated 80–100% of all new interest rate and FX derivatives transactions are covered by reporting requirements.” added the report.

Several authorities told the FSB they continued to have challenges in ensuring the efficacy of trade reporting due to poor data quality,  particularly the absence of Unique Transaction Identifiers and Unique Product Identifiers ; challenges in aggregating data across TRs (both domestically and cross-border); some legal barriers to reporting complete data into a TR and legal barriers to authorities’ access to TR-held data.

The FSB said: “A number of international workstreams are in place that should in large part address the issues identified above. To ensure adequate coordination of international work on trade reporting, the FSB has agreed on a work plan.”

For example, the CPMI–IOSCO Principles for Financial Market Infrastructures aims to coordinate cross-border oversight of TRs and an assessment is due to be published in the second half of this year.

Since February last year both sides of OTC and exchange-traded derivatives in Europe have been required to report trades to an authorised repository across a range of asset classes including commodities, credit, interest rate and equities. However there have been problems with both the quality of data being reported and reconciliations between the repositories. Last November Esma launched a consultation on how to improve data from trade reporting.

Investment banks have on average each spent almost $25m to comply with trade reporting requirements in US and Europe, and costs are expected to rise. Consultancy Sapient Global Markets conducted a survey of buy and sell-side firms on trade reporting of over-the-counter derivatives  during the International Swaps and Derivatives Association 2015 AGM in Canada in April.

The majority of respondents said reporting costs were likely to rise over the next two years. Of those using in-house systems, 61% expect costs to rise by a minimum of 25%, and 26% forecast costs will increase by more than 50%. The primary reasons for rising costs were concerns around maintaining reporting systems, adapting systems to meet evolving requirements and improving ongoing compliance.

The proposed MiFID II regulations covering financial markets, effective from January 2017, will extend reporting requirements to new asset classes. There have been estimates that the number of data fields that need to be reported will increase by 250% under the new rules.

The Sapient survey found that only 20% of respondents said they are beginning due diligence and assessing the impact of meeting MiFID II reporting and 35% said they do not know their firm’s level of preparedness.

Before MiFID II, the European Securities and Markets Authority requires authorised trade repositories to implement Level 2 validation by the end of October 2015. The added validation requires the contents of the required fields to be verified to ensure they adhere to the reporting technical standards – initial validation just checked if a field was complete or blank.

Feature image via Dollar Photo Club

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