Back in 2009, G20 leaders agreed that all over the counter (OTC) derivatives contracts should be reported to trade repositories (TRs) as part of a package of reforms aimed at improving transparency, mitigating systemic risk, and preventing market abuse; being able to aggregate all of this data across TRs would, in theory, help ensure that authorities can obtain a comprehensive view of the OTC derivatives market and its activity.
Trade reporting has since been implemented but, never ones to settle, regulators have been working towards a holy grail of a multi-jurisdictional harmonised derivatives reporting framework, and in April 2018, the Bank for International Settlement’s Committee on Payments and Market Infrastructure (CPMI) and IOSCO published their technical guidance to achieve that goal: 110 data fields appear in the guidelines, of which 51 have been adopted by both ESMA and the CFTC.
On the surface, that looks like a job only half done, but that’s not entirely true, according to Chris Childs, Managing Director, Head of Repository & Derivatives Services at DTCC.
“I believe this is a huge step forward. Of the 110 critical data elements (CDE) in the IOSCO guidelines, 51 will be universally adopted by regulators. Most importantly, we believe that these 51 elements contain most of the data needed for systemic risk analysis.”
An additional 26 CDEs in the IOSCO guidelines partially match and are therefore adopted by both the CFTC and ESMA but they are not aligned in format, values, and definition. Ten CDEs are not adopted by either regulator, and 23 CDEs are adopted by only one regulator. DTCC has conducted an analysis of CDE adoption in different jurisdictions which found that not only do the rules revisions differ on a number of CDEs, when they were analysed, differences beyond specific fields were uncovered, such as the reporting approaches at the transaction and post-trade-event levels. These divergent approaches arise because, even when both regulators adopt a particular CDE field, guidance permits variance in reporting approaches. A final discrepancy was found between the CDEs adopted by CFTC and ESMA is their incorporation of additional data elements that are not CDEs. Individual regulators may want and need to collect additional data that is useful to them, but if additional data is to be required, DTCC believes it should be reported using the same definitions, format and allowable values as the CDEs.
Still, the fact that the 51 CDEs that the CFTC and ESMA have adopted should cover the systemic risk issue is to be applauded. And the good news isn’t limited to the regulators; hedge fund managers which report in multiple jurisdictions stand to gain as they won’t need separate systems and processes for reporting purposes. That said, their current systems might not be up to the task, and many are currently evaluating their middle and back office to identify what needs to change.
“Conversations we have show how varied firm’s approaches have been. Clients are asking whether their technology stack is fit for purpose,” said Childs. “It’s not the data elements we’re talking about here. It’s where you’re capturing this data through your end-to-end process flows. They are asking whether they should build it themselves or buy an off-the-shelf solution.”
Of course, the impact of new rules and regulations can provide teething problems, and that could be the case here. Alongside the CPMI/IOSCO guidance, Unique Product Identifiers (UPI) are due to come down the pipe in the second half of 2022. The ISO 20022 standard is also being applied to the OTC derivatives reporting process, but the CFTC has a deadline of May 25, 2022, for reporting firms to implement its changes to its own trade reporting rules, which means that a hedge fund’s tech stack might need to be flexible in the short term.
Hedge fund managers that trade OTC derivatives will be busy in 2022 preparing for and implementing changes to their reporting processes, regardless of the jurisdiction of where they have to report. Ultimately, for Childs, whilst there are still differing reporting requirements in different jurisdictions, when all of the changes are implemented, this will be a win for all concerned.
“The good news is that the CFTC and ESMA are fully aligned on the most important CDEs for trade reporting. The number of differences in reporting fields and approaches suggests opportunities for them to revisit their plans at a later date with the objective of eliminating those differences. But by aligning their CDEs and reporting approaches, the CFTC, ESMA and the markets’ other regulatory bodies can enable consistent views across multiple jurisdictions as well as domestically. That’s good not only for the regulators but for all relevant market participants, including hedge funds.”
