By any objective criteria, swaps trade reporting has had an inauspicious start. In the US, where it has been in effect for over a year, the CFTC, which oversees reporting and repositories, has recognized that it isn’t working very well. Commissioner Scott O’Malia has spoken publicly about the reporting problems, and the Commission recently kicked off an initiative to revamp the whole US trade reporting process. In Europe, where the reporting requirement is a month and a half old, match rates (since both sides of the trade report in Europe) are running about 20%, which means that about 80% of the reported trades don’t appear the same between the two counterparties. Given all of that, it shouldn’t be a surprise that trade reporting is scheduled to go live in Canada in early July, for whatever it’s worth.
The Basic Questions
At Capital Markets Advisors, whenever we look at a reporting requirement, we ask several basic
questions:
- Who is requiring the reporting?
- Who is required to report?
- Whom do you report to?
- What products have to be reported on?
- When do you have to report?
- What previous transactions have to be reported, and when?
- What has to be in the reports?
These all sound basic enough, but the answers to even these questions usually turn out to be
complicated, and that’s certainly true in the case of Canada.
Who is Requiring the Reporting?
Under the Canadian constitution, each of the 10 provinces and 3 territories has its own securities regulator, and thus its own rules for things like swaps reporting. This potential nightmare has been mitigated somewhat by the agreement between three provinces – Ontario, Quebec, and Manitoba – on rules covering the reporting of swaps. In November, 2013 they issued two rules: Rule 91‐506 covers what products have to be reported on, and Rule 91‐507 covers the trade repositories and the reporting itself. At this point, reporting isn’t required by the other provinces and territories, and one can only hope that those provinces and territories will adopt the same rules.
Who is Required to Report?
The rule starts out saying that, “A reporting counterparty to a transaction involving a local counterparty
must report, or cause to be reported, the data required … to a designated trade repository.” So the first
question is, what is a local counterparty? The rule says it is where,
- “(a) … a person or company, other than an individual, [is] organized under the laws of [Ontario, Quebec or Manitoba] or … has its head office or principal place of business in [Ontario, Quebec or Manitoba];
- (b) the counterparty is registered under [Ontario, Quebec or Manitoba] securities law as a derivatives dealer or in an alternative category as a consequence of trading in derivatives;
- (c) … [there is] an affiliate of a person or company described in paragraph (a), and such person or company is responsible for the liabilities of that affiliated party.”
Of course, we’ve already encountered some complications. If an affiliate of an entity located outside one of those provinces (an “outside entity”) has its liabilities (not just its swaps) guaranteed by the local entity, then it appears to be a local entity itself, according to this. However, that outside entity might also be subject to another regulator, like ESMA or the CFTC, which has its own reporting requirements. Don’t worry, we’ll work it all out.
Then we have the question of who is a “reporting counterparty?” Here the definition is:
- “(a) if the transaction is cleared …, the … clearing agency,
- (b) if the transaction is not cleared … and is between two derivatives dealers, each derivatives dealer,
- (c) if the transaction is not cleared … and is between a derivatives dealer and a counterparty that is not a derivatives dealer, the derivatives dealer, and
- (d) in any other case, each local counterparty to the transaction.”
So, let’s follow this logic a bit. If a derivatives dealer is a local counterparty (a “local dealer”) doing business with a non‐dealer, it has the reporting requirement, but it appears that its counterparty, even if it is a local, does not. On the other hand, it appears that a local non‐dealer counterparty (a “local nondealer”), doing business with a dealer outside the provinces (an “outside dealer”), must report for itself. Got that?
Which leads us, of course, to the question of delegated reporting. Here the rule says, “A reporting counterparty may delegate its reporting obligations under this Rule, but remains responsible for ensuring the timely and accurate reporting of derivatives data required by this Rule.” So this sounds something like the EMIR rules, except that local non‐dealers doing business with local dealers do not have a reporting requirement. In other words, customers in these three provinces have an incentive to deal with local dealers, at least as far as reporting is concerned. That way they don’t have to report and they don’t have to set up delegated reporting arrangements.
Whom Do You Report To?
Here the rule refers to Section 21.2.2 of the Ontario Act, which reads, “The Commission may, on the application of a person or company proposing to carry on business as a trade repository in Ontario, designate the person or company if the Commission considers it in the public interest; [which designation] must be made in writing and is subject to such terms and conditions as the Commission may impose.” So which repositories have been designated? None yet. And DTCC, the most ubiquitous repository worldwide, has indicated that it won’t have a Canadian repository until after 1/1/2015. We’ll have to see if there is a designated (called recognized in Quebec) repository available by July. Come to think of it, we’ll need that repository quite a bit before July, so we can hook up to it. Are we worried yet?
What Products Have to be Reported On?
This question is covered by Rule 91‐506, the companion to 91‐507. Oddly (or perhaps not so oddly, considering the amorphous nature of derivatives) the rule starts out by describing what isn’t a derivative. So, what isn’t a derivative? A bet (as regulated under gambling legislation), insurance, spot FX, a bank deposit, anything traded on an exchange (exchanges don’t include SEFs), or anything included in a rather voluminous definition of a security. This may sound rather Rube Goldberg‐ish, but, given the changing definition of a swap, it might actually work. The intention here seems to be to arrive at the same definition as every other regulator, but the exclusionary method, as opposed to the inclusionary method, may end up yielding some interesting disparities.
When Do You Have to Report?
Section 31(2) of the rule says that the reporting party “must report creation data in real time,” unless it can’t, and then it “must report creation data as soon as technologically practicable and in no event later than the end of [T+1].” The reporting requirement for lifecycle events is EOD T+0, again unless you can’t. Then the requirement is EOD T+1. Valuation data is due daily from dealers or CCPs and quarterly from everyone else. Given that we have no designated repositories six months before go‐live, I suspect that real‐time reporting may be a stretch.
What Previous Transactions Have to be Reported, and When?
Any reportable transactions in existence on 7/2/2014 will have to be reported by 12/31/2014.
What Has to be In the Reports?
Here the list is pretty much the same as every other regulator requires, including LEI (which of course doesn’t really exist yet), the UTI (which is created ad hoc by the reporting party, since there is no standard) and the UPI (which nobody has been able to define). Pretty much the usual mess.
What Are the Takeaways?
By now, firms should be familiar with the drill of getting ready for reporting. Everyone has to determine independently whether the requirement applies to them, and for which trades. The new news here has to do with local non‐dealers, who need to decide whether to set up delegated reporting arrangements or restrict themselves to local dealers for derivatives. Of course, those who are going to be reporting will have to set up connectivity and syntax with the designated/recognized repositories, of which there are none yet. And everyone has to keep an eye on the other provinces and territories, in case they jump into the fray. Sounds like same old, same old, eh?
