Trade reporting costs on the rise 

Shanny Basar

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.

Paul Gibson, a business consulting manager with Sapient Global Markets, told Markets Media that the $25m estimate may be too low.

Gibson told Markets Media: “I spoke to a small European bank and they had spent more than $10m. These costs are not being factored into margins on a daily basis and the cost per trade will only increase as more asset classes have to reported.”

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, 72%, rely on in-house systems to meet reporting requirements in both the US and Europe. The survey said: “However, despite sizeable investment, firms are struggling to overcome the complexity and manage the costs of maintaining compliance due to the implementation of disjointed, siloed approaches to trade reporting.”

Gibson said firms use their own systems due to the short deadlines given by regulators to meet reporting requirements, which did not leave enough to analyse vendor platforms. In addition, in most firms OTC derivatives data was not held centrally but had to be pulled together from different systems.

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 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.

“Some may be waiting for final technical standards, however much of the reporting infrastructure requirements under MiFID II are already known,” added Sapient. “Given the scope of the requirements and how these rules will spur significant changes – increased volumes, transactions and data fields, as well as data archiving – MiFID II preparations should already be underway.”

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.

Since February last year both sides of OTC and exchange-traded derivatives 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, which will be critical in setting policy under new MiFID II trading regulations.

In its response to the Esma consultation paper, Markit, the data provider, said in its response that Esma should consider switching to single-sided reporting.

“This is because the double-sided reporting obligation under Emir has proved to not only impose a very significant burden on smaller market participants but also reduce the quality of the data that is captured in trade repositories,” added Markit. “Such change could most easily be achieved by providing exemptions to certain categories of market participants for transactions that their counterparties already report.”

Natixis Asset Management said in its response to the Esma consultation hat trade repositories and market participants need more time to adapt their systems. “The implementation of the proposed new data fields and reporting duty by market participants (and especially by the asset management companies) needs more time,” added Natixis. “We are of the opinion that the earliest possible time to start the reporting is six months (and preferably one year) after the publication of the Regulation in the Official Journal.”

Featured image via NAN/Dollar Photo Club

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