Where it makes commercial sense, fund managers are electing to report their OTC and exchange-traded derivatives directly to the trade repositories. In theory, those fund managers looking to delegate the reporting have several choices: their clearing broker, their fund administrator or a technology or service vendor.
The administrative burden of reporting derivative trades under the European Market Infrastructure Regulation (EMIR) is forcing firms to take one of three approaches. Those with sufficient scale are relying on their clearing brokers to report trades to repositories. Others are electing to report to trade repositories themselves directly. Firms lacking the volume of business to persuade their clearing broker to do the job, or which lack either the investment capital or the appetite to report directly, are employing external vendors.
Firms that are already engaged in regulatory reporting on behalf of fund management clients – including, for example, the London Stock Exchange subsidiary UnaVista, which is also running a trade repository (see profile on page p. 63) – are obviously well-placed to take on the role of reporting derivatives to repositories under EMIR. UnaVista already processes 1½ billion trades per year on behalf of more than 700 firms regulated by the Markets in Financial Instruments Directive (MiFID), which puts it in an excellent position to report under EMIR.
That UnaVista covers all asset classes further enhances its appeal to fund managers. David Nowell, head of industry relations and regulatory compliance at UnaVista, says the firm allows sell-side brokers to report absolutely everything on behalf of their fund manager clients. The UnaVista rules engine service will then map and translate the data before it is sent to the trade repository. Alternatively, fund managers can deliver reports to UnaVista based on data specifications set out by UnaVista. MarkitSERV reckons it is another provider which can help managers. Its trade reporting service is already used by fund managers to comply with reporting regulations laid down by the Australian Securities and Investments Commission (ASIC), the Hong Kong Monetary Authority (HKMA), the Japan Financial Services Agency (JFSA), the Monetary Authority of Singapore (MAS), the OTC Derivatives Regulators Forum (ODRF) and the Commodity Futures Trading Commission (CFTC) in the United States.
The firm says it can collect Unique Transaction Identifiers (UTIs) from execution platforms or central counterparty clearing houses or generate them itself for a range of asset classes in all of these jurisdictions, including the derivatives covered by the EMIR regime. MarkitSERV adds that its network enables users to send, receive and agree UTIs. Henry Hunter, managing director at MarkitSERV, says the existing services are easy to adapt to the demands of trade reporting under EMIR. “There are more than 1,500 firms already using our confirmation and affirmation services or straight through processing service from execution venues, so we have an electronic record of those OTC transactions already at hand,” he says. “These clients are trading in rates, credit derivatives, equity derivatives and FX derivatives. Now regulators have come in and required many of those firms to report those trades to a repository. If firms use MarkitSERV for the aforementioned services, then all we need to do is to configure the system according to their preferences, including set-up of static data relevant to those firms, for example, to help us to determine which jurisdiction each trade may be subject to. Then, each time a trade is confirmed or processed, we compile the relevant data for the firm, and send it to the trade repository on their behalf.”
ConceptOne is another firm that is helping clients meet their EMIR reporting obligations. Its Regulatory Enterprise Risk Management (RegERM) service helps firms report not just EMIR but Form PF to the Securities and Exchange Commission (SEC), Form CPO-PQR to the CFTC and Annex IV under the Alternative Investment Fund Managers Directive (AIFMD).For EMIR, ConceptOne simply collects all of the trading data between funds and various counterparties, including prime brokers and fund administrators, and aggregates it into the prerequisite format for the manager to report to the trade repository. “We can report all asset classes on behalf of our clients and we can tailor it accordingly to the specifications of the various trade repositories,” says Gary Kaminsky, managing director for global regulatory and compliance at ConceptOne in New York. “We work closely with our clients’ counterparties in order to deliver this data.”
A handful of fund administrators have also launched services to help clients report derivatives trades. SS&C GlobeOp, for example, is already reporting client trades to repositories. “We have most of our clients’ data in-house, because our clients use us for the bulk of their middle and back office work, in addition to fund administration,” says Jon Anderson, global head of OTC derivatives and valuation services at SS&C GlobeOp. “We have the necessary data and we are connected to the main trade repositories so we can report on behalf of clients.”
However, the majority of fund administrators do not see EMIR as a revenue generator. While many have the technology infrastructure and data to report swaps transactions, there is a surprising lack of interest. One consultant, speaking anonymously, attributes this to the haphazard way EMIR was implemented, giving fund administrators precious little time to develop products to help clients with their reporting obligations. It is also possible these fund administrators felt they would be unable to compete with the more established vendors in this space.
Technology vendors have entered the EMIR reporting space too. For third party technology vendors, the principal challenge is to gather the data that must be reported from the fund manager, for onward transmission to the repository. “The problem with outsourcing EMIR reporting requirements is that no single counterparty will have all of the relevant data at hand, so buy-side firms are going to have to outsource to a number of counterparties and ensure they have control over these relationships,” says Carsten Kunkel, manager of the regulatory and compliance group at SimCorp. SimCorp currently enables managers to store the relevant trade data in a trade repository pool through its SimCorp Dimension application. The firm also provides functionality that enables managers to map the relevant data, so it can be configured internally to fit different regulatory standards. “In our client base, we currently have 25 buy-side firms using our system which need to be compliant with the new regulation,” adds Kunkel. “We provide software and support the client implementing their trade repository reporting obligations inhouse.
A lot of outsourced service providers do not have all of the relevant data at hand, which can make reporting complicated, and outsourcing less attractive. The biggest challenge for managers is maintaining control over multiple outsourced relationships, particularly when regulators are demanding so much data. The cost savings from outsourcing to technology vendors also need to be added to the equation. “The costs will be determined by how many outsourced providers are reporting the trades,” says Kunkel. “If you just have one counterparty reporting the trades, outsourcing might be viable from a cost point of view but if there are a number of relationships, this could be costly for managers.”
Judy Leung, an associate director at Kinetic Partners, the regulatory compliance firm, agrees there are a number of pros to be gained from outsourcing, although she adds that consultants such as her own company are not reporting for clients but providing an advisory service. “Under EMIR, funds retain regulatory responsibility for the accuracy of the data within the trade report,” she says. In practice, this will fall to the fund managers. This is a new concept for managers who are not geared up for trade reporting even under MiFID. In contrast, the sell-side have extensive regulatory, operational and IT reporting experience.
“Fund managers may wish to leverage sell-side experience but need to maintain oversight and control over the data through regular monitoring,” says Leung. Laven Partners, much like Kinetic, is electing not to report on behalf of clients but has been helping customers assess their portfolios and ascertain which transactions meet the EMIR definition of derivatives. The firm also assists managers with obtaining their Legal Entity Identifiers (LEIs) and can procure a review of legal agreements signed with repositories and service providers offering delegated reporting. “A lot of firms have found it difficult to obtain their LEIs in good time, and there is a risk smaller managers could be forced to sign one sided legal agreements with some of their service providers,” says Jonathan Wedgbury, business development manager at Laven Partners. The reporting obligations under EMIR are potentially onerous, and become more so if fund managers are using multiple service providers to report to repositories. Multiple sources and service providers can also add to costs. Nonetheless, a number of providers are offering services that will help managers attain some degree of control over the reporting process, which should help mitigate the risk of inaccurate data being supplied to repositories.