James Rundle: Reporting for Duty

The first wave of reporting for the European Market Infrastructure Regulation (EMIR) was not exactly a resounding success. Months afterward, only small numbers of trades are able to be matched—as low as 3 percent in some asset classes—and with the various operational and technology issues at the trade repositories (TRs), people were understandably concerned about August 11, when additional requirements came into force.

The European Securities and Markets Authority (Esma) didn’t exactly help. While there is something to be said for directness, flatly telling the industry that Esma has done enough, and will not be issuing further guidance, smacks of churlishness. Luckily, the need to report collateral figures and valuations seems to have passed without any major incidents. Indeed, it sailed by so quietly that you could hear a collective pin drop in the trade media, most of which was alight with discussion and debate following February’s initial deadline for general compliance.

Some regulatory agencies have taken forward-looking approaches, of course. The UK’s Financial Conduct Authority (FCA) has been lenient with dispensing sanctions over reporting failures, but this cannot, and will not, last forever. The key problem seems still to be the unique trade identifier (UTI) and its generation by both sides of the trade. When that doesn’t match up, it’s simply impossible to reconcile two different trade reports, particularly if they’ve been submitted to two different repositories.

Naming and Shaming
Some have suggested naming and shaming those whose trade reports can’t be matched, or those who frequently file reports incorrectly. This would amount to a leader board of sorts, with the top rankings being of distinctly dubious recognition. This, proponents say, may spur regulators to take a closer look at those who consistently fail to match trades.

The idea is unlikely to gain much currency among TRs, and certainly not among the members of those TRs that would suffer reputational damage, although that is the point. Publicizing those who perform poorly, though, doesn’t get to the root of the issue, which is that many of the load-bearing walls for this process weren’t properly implemented before compliance was demanded. The UTIs need to work, as do other components of the regulation.

The phrase “regulatory tsunami” is overused, but it describes how much banks and brokers have to be focused on these days.

It’s not just a problem with EMIR, but with other reporting regulations as well. Take Common Reporting (Corep) and Financial Reporting (Finrep)—both exercises in standardization, but which include inherently non-standardized requirements. Firms, for instance, are mandated to run multiple legacy taxonomies on their data, despite the move to XBRL. As a result, various data structures that are ultimately redundant have to be maintained—at great expense and technical complexity—while firms must adapt to new rules as well.

Admirable Goals
Reporting has laudable goals, and a more transparent system is a safer system. But the technology requirements can be onerous, particularly in light of how many other areas require vast technological spend in order to bring them up to scratch. While regulation in these areas was sorely needed, it’s easy to appreciate the knock-on effects of large volumes of data being submitted at one time. Investment banks are also starting to wind down certain parts of their business. Take, for example, a number of the traditional powerhouses in fixed income and commodities, reducing their focus on or exiting those markets altogether, making it hard to classify them as tier-one any more.

The phrase “regulatory tsunami” is overused, but it describes how much banks and brokers have to be focused on these days. It’s not helpful for anyone, regulators and banks alike, when the simplest parts become overwhelmingly complex through a lack of insight and poor planning. And without getting the basics right, the future isn’t sunny for the more complicated tasks down the road.