Regulators have given derivatives counterparties more time to back-load their existing swap portfolios into the trade repositories. However, even back-loading is bedevilled by unique identifiers and, in this case, the difficulty of agreeing and assigning them to transactions which took place in the past.
The European Market Infrastructure Regulation (EMIR) came into force on 16 August 2012. Every derivatives trade still outstanding after that date, or transacted after it, has to be reported to a trade repository within 90 days of 12 February 2014, unless it was a trade that existed before 16 August 2012 and expired before 12 February 2014.
Even those trades still have to be reported eventually: transactions agreed on or after 16 August 2012 have to be reported to a trade repository within three years of 12 February 2014, even if they expired before 12 February 2014. Which means trade repositories could still be absorbing historical data in early 2017.
It may take that long, since back-loading presents a number of challenges. Not the least of them is the fact that, for both parties to report historical trades, Unique Trade Identifiers (UTIs) (see “UTIs: what they are, who needs one, and where to get one,” page 22) and Unique Product Identifiers (UPIs) see “UPIs: what they are, who needs one, and where to get one,” page 26) have to be attached to them. This is hard enough for contemporary trades. It is harder still if the natural point of selection of a UTI and a UPI - namely, the confirmation of the trade – occurred years ago.
That said, this is less problematic for exchange-traded derivatives, since they are completed on-exchange, and automated messaging, confirmation and matching records still exist. Of course, the work still has to be done. “The challenge that the market faces in Europe – and this is different from the United States - is exchange-traded derivative reporting,” says Bruce Tupper, president of ICE Trade Vault. “We are closely working with ICE Clear Europe to ensure the back-loading of exchange-traded derivatives is seamless.”
But going back and enriching existing exchange-traded derivative data with a UTI is tiresome rather than close to impossible, as it sometime appears in the OTC derivatives markets. OTC derivative transactions, agreed off-exchange on a bi-lateral basis in a near-unregulated environment without much supporting infrastructure, are undoubtedly much more difficult.
To assign UTIs and UPIs to historical swaps entails the counterparties to a trade contacting each other to agree it. “Our clients have been able to report their back-loaded data into our system,” says Danny Corrigan, CEO of CME European Trade Repository. “One issue from our point of view, however, is the assignment of a UTI to these historical trades. How do you do that? Some firms are getting people to re-key these swaps and some of them have 100 fields in them.”
Even if only 15-20,000 trades are affected, entering 100 fields could mean re-keying 2 million pieces of data, even before adding a UTI or UPI. “Where automated trading existed and messaging services were in place, this has already been done, but this just was not the case where a lot of these derivatives were concerned,” continues Corrigan. “Non-cleared OTC swaps are an issue in this regard. We thought that we could help to clean this up, but it is very messy. It is also, being honest, not our responsibility.”
He says that in the United States, CME operates an automated system that can comb through historical data, enrich it with a UTI, and make the revised data available in a readable form to the regulators. “That is fine within one trade repository, but when you have two repositories attempting to match each side, it is very messy,” says Corrigan.
Regulators are taking an indulgent view of back-loading, as they have of everything else that has gone wrong since 12 February 2014, provided market participants are making serious efforts to be compliant. “It is a regulatory requirement, so providing this data is imperative,” points out Mark Husler, head of business development at UnaVista. “Organisations are looking through their historical archives and trade databases to create this information for back-loading. This will not be straightforward. It is a challenge. Looking back over the archives, through different systems and counterparties, is not easy. But organisations are getting this data together because they have to.”
Stewart Macbeth, CEO of DTCC Derivatives Repository Ltd (DDRL) and chief product development officer of DTCC Deriv/ SERV, agrees. “This area is difficult for everybody,” he says.“There is a lot of work for clients to do, and it all relates back to the actual reporting requirement, with the inclusion of UTIs. Many clients are having to add these retrospectively and, in some cases, create them. There is a lot of data that needs to be captured that, on a forward-looking basis, clients now know needs to be captured.”
Being an American trade repository can help, since the Dodd- Frank Act required back-loading as well, imparting valuable experience. “Under Dodd-Frank there was historical backloading of data as well, which extended to July 2010, when the Act took effect,” recalls Bruce Tupper. “We took in several million trades as a result of this. So the customers where there is crossover between the United States and Europe are ready, and we were successful in helping them with this in the United States. In the OTC space, we feel that we have demonstrated our competency in helping clients with their obligations.”
On the other hand, European derivatives users have welcomed the opportunity to get their outstanding swap portfolios in order, says Damien Gillespie, executive director and head of Europe and America sales at Clearstream, which has developed the REGIS TR trade repository in conjunction with Spanish clearing house Iberclear. “Many clients are using back-loading as an opportunity to prove that their systems are working, especially considering that the file format for the back-loaded data is essentially the same for all new trades,” he says.
However, some question the value of back-loading to the regulators, warning that they will be inundated with backward looking data. Iwona Sroka, CEO of Krajowy Depozyt Papierów Wartościowych (KDPW_TR), the Polish trade repository, begs to differ. “If the initial position of a client is to be assessed, this has to be done by trade repositories based on data received in back-loading,” she explains.
A more worrying issue for repositories and regulators, thinks Sroka, is the fact that in many cases the counterparties to historical trades are reporting them to different repositories. “If we were to assess clients’ initial positions based on backloaded data, such positions could only be assessed based on data reported to KDPW_TR,” she says. “This means that only a partial position could be assessed due to the issue of data reconciliation in Europe. Counterparties which are required to report historical derivatives trades are not required to report all of their trades to a single trade repository.”