By drawing on its American experience, devising intelligent distribution strategies and keeping its broader product range in sight of potential clients, CME Group is building a substantial European following. CME European Trade Repository is one of the six trade repositories approved by the European Securities and Markets Authority (ESMA) last year, and one of five that will accept reporting across all exchange-traded and OTC derivatives.
There was some surprise when CME Group did not feature in the first set of ESMA approvals on 7 November. However, approval came through just three weeks later on 29 November 2013. If so, CME can afford to enjoy the fact its own performance since reporting started in earnest on 12 February 2014 was superior. A solid start is unsurprising, since CME Group gained plenty of experience operating one of the four swap data repositories (SDRs) registered with the Commodity Futures Trading Commission (CFTC) in the United States. Despite the differences between the United States and Europe – notably two-sided reporting and the inclusion of exchange-traded derivatives in Europe – that tacit knowledge proved invaluable.
“Learning from all of the errors that occurred there is our strong suit,” says Daniel Corrigan, CEO of CME European Trade Repository. “We have experience of the on-boarding process and have learnt from the things that went wrong. It is a little bit easier in the United States, with a smaller product range and single-sided reporting, but there have been lessons learnt.”.
Chief among them is that CME Group endeavoured from the outset to reproduce in Europe the fully automated model it built in the United States to comply with CME Rule 1001. That rule ensures that any transaction cleared via the in-house central counterparty clearing house (CCP) is reported automatically to the CME SDR. While there is no rule to underpin a similar arrangement in Europe, CME Group is offering a delegated reporting model to clients of its European CCP, by which they can rely on CME Group to deliver data to CME European Trade Repository free of charge. If that offer is commercially inspired, it is also proving popular with clients struggling to achieve full compliance with the European Market Infrastructure (EMIR) reporting mandate.
“In Europe, we have had a lot of smaller corporate clients approach us about direct reporting, as they are struggling with the definitions and the picture has not been made all that clear to them,” says Danny Corrigan. “They are dealing in low volumes and are struggling to understand what it is they need to report and how they should go about reporting to a trade repository. We have been very active in helping these clients, but I would say that it is beneficial for them to come directly to us since they are then in control of the entire process.”
Going directly to CME Group also opens those clients up to a broader range of post-trade products at a time when CME Group is still building its way into the European marketplace. In fact, the in-house delegated reporting model is bound to be copied by other repositories with a CCP in the same orbit, such as REGIS-TR, UnaVista and ICE Trade Vault. However, clients that want to buy a straightforward third party reporting model from CME Group can also do so, and even the CEO of CME Trade Repository accepts that it makes sense for a lot of fund managers to stick with their existing reporting service.
“The delegated reporting model is nice and neat: client to clearing to trade repository,” explains Corrigan. “The fund managers, however, only act as agents. Each fund has to report, but the fund manager can do this for them. There are a number of providers that fund managers can pass the reporting piece on to. In cases where market participants are using an approved reporting mechanism (ARM) for reporting under the Markets in Financial Instruments Directive (MiFID), it makes sense that you would use that provider to report under EMIR into your trade repository of choice. Those companies offering this service know what they are doing – they know how to report. These firms have been doing it under MiFID for years. They have a proven track record in keeping firms out of trouble with the regulators as regards reporting. EMIR is different, but that track record of reporting is there and why would you not use them if you trust them? The issue, of course, is that you cannot remove your responsibility for the data through delegation or outsourcing. The underlying responsibility for accurate and timely reporting always lies with the end-investor.”
Of course, these reporting services need connections to all trade repositories, including CME European Trade Repository, so working with them is not just an accommodation to reality but an astute distribution long term strategy. Corrigan also understands that CCPs can be a valuable source of additional business, especially in third countries without commercial or historic ties to a direct competitor. “We are in communication with a number of CCPs globally,” he explains. “In the event that a clearing member of a CCP is a European Union (EU) entity, then there is a reporting obligation. We are trying to bring that flow through into our repository.”
Stock exchanges, not all of which are supported by an inhouse or tied CCP, are another potential source of traffic for CME European Trade Repository, but they are proving harder to excite. “There is in excess of 80 exchanges out there, but the problem we are facing in approaching them is that they do not understand that their clients have a reporting obligation and that there are steps that they can take to help,” says Corrigan. CCPs, on the other hand, cannot avoid a clear understanding of what market participants are obliged to report. The clearing brokers that dominate their strategies have to report their side of every derivative trade, and the CCPs themselves are identified by ESMA as a potential source of Unique Trade Identifiers (UTIs) (see “UTIs: what they are, who needs one, and where to get one,” page 22). CCPs, along with ARMs and clearing brokers, are potentially agents of firms that wish to delegate their reporting to trade repositories, which oblige them to understand the multi-repository system at work in Europe.
With multiple repositories, reconciliation of trade reports between repositories has emerged as a major issue since reporting began on 12 February 2014. It is commonplace for one repository to receive one side of the transaction, and another repository to receive the other. Reconciling the especially in the absence of a commonly agreed method of generating and agreeing UTIs, has proved challenging. This was always understood to be problematic, and led to much discussion in the weeks ahead of 12 February 2014 about the ability of repositories to inter-operate with each other. “I do not like the word interoperability,” says Danny Corrigan. “We refer to it as pairing. Pairing is three fields: UTIs, LEIs for both counterparties to a trade. That is pairing. It is part of reconciliation. Phase one of pairing is reconciliation and phase two is comparing. The inter-trade repository service that we have been working on is that each repository sets up files that are accessible to the other five repositories. You can then go into these files and look for the other side of the trade, where you only have one half of it.”
Experience after 12 February 2014 bore out the concerns expressed by Corrigan in the weeks ahead of the start of reporting. He warned that LEIs were not being issued fast enough, and that ESMA left it until too late to sketch out how it expected UTIs to be generated, and that the process for the creation and assignment of Unique Product Identifiers (UPIs) is even now worryingly vague (see “UPIs: what they are, who needs one, and where to get one,” page 26). The result was difficulties in reconciliation of trade reports, especially between repositories.
What went well, however, was also predicted by Corrigan: the automated transmission of data between CME Clearing and CME European Trade Repository. “It is very easy when it comes through from your clearing house,” he points out. “The issue is with all of the different messaging platforms that come in, and where there is no standard format for messaging, such as with FX swaps and forwards. They are not centrally cleared and there is no automated trading, so the messaging is a nightmare. That is where the risks are being concentrated. UTIs and UPIs are still a cause for concern at all the trade repositories.”
UTIs have also emerged as an issue in the back-loading of historic trades (see “Backloading: how far back does it go, and how hard is it to do?,” page 32) but the sheer volume of transactions that have to be reported has, predictably, become an issue in itself since 12 February 2014. This reflects a European peculiarity for which even the American experience could not prepare the CME. “Europe is a much, much larger market,” explains Danny Corrigan. “The volumes are significantly larger as a result of the inclusion of exchange traded derivative reporting under EMIR. Exchange-traded transactions, if there are clients on both ends, can result in up to eight trades.”
Exchange-traded derivatives currently account for nine tenths of what is being reported in terms of volume, but Corrigan is not grumbling. “We had to adopt a broad scope at our trade repository because our marketing team are contacting participants from every corner of the market,” he says. “Certain sectors tend to specialise in certain asset classes. For example, banks tend to specialise in FX and corporates tend to specialise in commodities and metals. If we were to limit the scope of our trade repository, we would be limiting the scope of our marketing division.”
That said, Corrigan is not convinced that Europe has got the right number of trade repositories, though he predicts specialisation rather than consolidation. “I think there is scope for the trade repositories to be broken down by the asset classes that other areas of their businesses specialise in, or are perceived to be specialists in,” he says. “I think that DTCC GTR will specialise in interest rate swaps and forward FX, for example, and ICE Trade Vault will concentrate on their own suite of futures. We will concentrate on our own suite of futures and centrally cleared OTC derivative contracts.”
Pressed on whether the European derivatives markets can accommodate as many as six providers, even if they choose to specialise, Corrigan reckons consolidation will be sparked not by EMIR but by the Second Markets in Financial Instruments Directive (MiFID II) and the accompanying Markets in Financial Instruments Regulation (MiFIR). “It is an interesting question,” he says. “The big stumbling block is the cost of establishing a trade repository. The application cost alone is €100,000 and the total cost can run up to €20 million. A lot will now depend upon what happens next with MiFID reporting. With MiFIR, it looks like the application costs are going to be just as high. There is definite room for consolidation in the trade repository and Approved Reporting Mechanisms (ARM) world.”
From a strategic perspective, CME Group cannot afford not to be involved in the provision of trade repository services. “For us, brand recognition is a big deal,” explains Corrigan. “For the expansion of CME Group, we needed a clearing house, we needed a repository and we needed automated platforms. So the trade repository is one of the three legs that we have to have. We are also really concerned with keeping the markets trading. If we can help people to report easily and conveniently, they are much less likely to take the view that they will not trade anymore.”
He thinks standardisation is a more urgent need than consolidation. “A real issue is the one of language,” says Corrigan. “There is no consistency of the language of reporting. This does not apply to exchange-traded derivative transactions, since standard messaging has existed in that space for a long time. But where you do not have that, as in the OTC derivative space, problems are starting to emerge.”