07.25.2014
On August 11, trade reporting requirements under European Market Infrastructure Regulation (Emir) will kick in, requiring firms to report valuation and collateral information, in addition to the basic trade reporting requirement that they have been subject to since February. This puts the onus on buy-side firms to either do the reporting themselves, or delegate it to their sell-side broker.
“From a buy-side perspective, a lot of firms thought they could delegate to their sell-side brokers to report on the behalf, and that’s what happened in February,” said Mark Husler, chief executive of UnaVista, which provides a platform for trade matching, validation and reconciliation. “Move forward to August, what they’ve now realized is that the sell side does not have the collateral and valuation data to report on their behalf.”
Husler and his team have been visiting U.S. asset-manager clients to assess their readiness. “A lot of the large asset managers that we have helped have come to the realization late in the day that they can delegate reporting, but they can’t delegate the liability that comes from dual-sided nor can they delegate the collateral and valuation reporting,” Husler said.
UnaVista, a unit of London Stock Exchange Group, provides regulatory compliance and reporting services, and is also an approved reporting mechanism for MiFID and Emir Trade Repository in Europe. The company has about 1,000 clients, whom it helps report derivatives trades, and also helps U.S. firms comply with Dodd-Frank reporting requirements.
“Our role is to assist clients to gather the relevant data from their front-, middle- and back-office systems and feed that into our regulatory rules engine,” said Husler. “We consume data in a machine-readable format from our clients. We then work with the client on rules-based logic to work out which regulation these trades need to be reported to, whether it’s MiFID, Emir, Short Selling, AIFMD, Fatca, etc. We do that analysis with our clients so they can recycle those trades to comply with reporting regulations.”
Unlike Dodd-Frank, which only requires reporting of OTC derivatives transactions, Emir requires reporting of listed as well as OTC derivatives. The consequences for a firm not being in compliance can lead to heavy fines.
“If we learn from the lessons of MiFID, when it first started it was a ‘fire and forget’ regime,” Husler said. “Everyone was concerned about getting data to the regulator, but no one was overly concerned about completeness and accuracy. That’s where are with Emir. The difference is that there are multimillion pound fines being handed out where firms that were stuck with that fire and forget mentality still haven’t got the risk and control functions in place.”
He added, “Our key message is that, yes, it’s about adhering to rules and getting data out the door, but you may as well get it right from day one,” said Husler. “So we focus on helping clients with risk and controls, not just warehousing.”
Unlike the Dodd-Frank Act, which has a single-sided reporting obligation, meaning the executing broker or clearing member has responsibility for reporting to a trade repository, Emir is dual-sided, meaning that both the firm itself and the broker or clearing member are required to report.
Although the firm has the option of delegating to the broker its reporting obligation, it cannot delegate liability for the collateral and valuation information that it provides to the broker.
“The fund managers have a choice: do they let the broker report on their behalf or do they report in their own right?” said David Nowell, head of industry relations and regulatory compliance at UnaVista. “With the collateral and valuation, because of the difficulty in sourcing that data, a lot of the fund managers are now thinking it may make sense to report in their own right, and the brokers themselves are thinking whether they can continue to offer this delegation service. If firms have gone down the delegation path, they need to enrich the record on a daily basis with valuation and collateral.”
