Predictably, corporate counterparties have found derivative trade reporting under the European Market Infrastructure Regulation (EMIR) more challenging than their counterparts in the financial services industry. Unlike banks, they do not live and breathe compliance at work every day. Derivatives are handled not by teams of hundreds, but sometimes by a single individual in the corporate treasury department. Corporate treasury systems were ill-adapted to reporting derivatives.
Corporates faced the additional challenge of having to report dozens of inter-company transactions that, in aggregate, added up to zero. Few corporates are high volume users of derivatives. Most use swaps, and futures and options, not for trading purposes, but for hedging interest and exchange rate risk. Understandably, corporates felt EMIR was primarily a banking regulation. As late as the first week of February 2014, two out of three corporate respondents to a poll by software provider Reval frankly admitted they were not ready by agreeing that they expected regulators to give them special dispensation from full compliance with their EMIR reporting obligations.Corporates were, on the whole, astonishingly slow to obtain Legal Entity Identifiers (LEIs) too despite the fact they are essential to reporting successfully (see “LEIs: what they are, who needs one, and where to get one,”).
“From my experience there is still a lot of work to do for the corporates,” observes Damien Gillespie, head of Europe and Americas sales at Clearstream Banking - the group that, in tandem with Iberclear in Spain, owns the REGIS-TR trade repository - a few days before the deadline of 12 February. “I believe the more sophisticated clients, like the banks, clearing houses and larger corporates, are aware of the reporting mandate. I believe a lot of the smaller corporates that are also required to report do not know a lot of technical details and they are really relying on their banks or their software partners to provide solutions for them. So a lot of the smaller corporates may not come directly to a trade repository. They may use a third party or rely on their banks to report on their behalf.”
This prediction was not entirely borne out by experience. Corporations, being less active users of derivatives, naturally reasoned that the limited quantities of data they had to report made it plausible for them to do the work in-house. In practice, this proved more difficult than anticipated. Some found it was impossible to connect to the repository of their choice on time, and not only because they filed their applications late. It did not help with preparations that the details of how trades should be reported continued to change right down to 12 February 2014. However, many corporates had no choice but to connect directly to a trade repository because finding a third party to take on the reporting proved impossible. Clearing banks and brokers, as Stewart Macbeth, CEO of DTCC Derivatives Repository Limited and chief product development officer of DTCC Deriv/SERV pointed out at the time, were the organisations best placed to help corporates comply with EMIRreporting.
“There are software providers, middleware providers, IT solutions, connectivity providers, banks and fund administrators,” said Macbeth. “There is a lot out there in the market. That in itself is, I think, a little bit overwhelming. It is a very complex landscape. A lot of banks, particularly those that deal with very small corporate clients, are realising that these customers do need help because they trade relatively infrequently and do so for risk management or hedging purposes. The banks are going to have to help them because they cannot do this directly, as they are just too far from the financial market infrastructure. It would be a huge step for these companies to start dealing with trade repositories when they have only really ever dealt with their local bank.” Unfortunately, clearing brokers left it until remarkably late in the run-up to 12 February 2014 to offer delegated reporting to clients, let alone corporates. Even then, those that did offer a service proved willing to provide it to larger companies only. Their appetite declined sharply with size. As a result, many corporations passed the deadline of 12 February 2014 without any kind of help from clearing brokers or banks.
“The challenge for the larger corporates is very simple,” says Gillespie. “If they are multi-banked and are completing intercompany transactions they will need to get a solution in place by either coming direct to a trade repository or by using a third party. There is no guarantee that the banks will report on their behalf.”
Indeed, there was not. Another problem was that banking counterparties based outside the European Union (EU), including Swiss and Norwegian banks inside the European Economic Area (EEA), had no delegated reporting service to offer at all. Corporates without an internal reporting mechanism to cover these trades themselves had a gap in the coverage of their derivative activities. Anecdotal evidence gathered since 12 February 2014 suggests corporates have on the whole elected to report OTC derivative transactions directly, while relying on a third party (usually the clearing broker, rather than a middleware provider) to cope with the reporting of their exchange-traded transactions. As reporting beds down over the coming months and years, corporate reliance on third party service providers can be expected to increase.