A survey of 40 hedge fund managers by SunGard and Aite Group in October 2013 was telling. Asked about their most pressing regulatory concerns, the overwhelming majority of respondents identified the Foreign Account Tax Compliance Act (FATCA) and the Form PF that must be submitted to the Securities and Exchange Commission (SEC) in the United States as their top priorities.

This ranking of regulatory demands was closely followed by the coming of registration to manage money in Europe under the Alternative Investment Fund Managers Directive (AIFMD) and the pressure to fill in the Open Protocol Enabling Risk Aggregation (OPERA) risk reports disseminated by Albourne Partners. Reporting derivative trades in compliance with the European Market Infrastructure Regulation (EMIR) came in a lowly fifth.

Yet in October 2013, the deadline for reporting under EMIR was a mere three and a half months away, and its operational and technological implications were profound. That same month a study of the “Cost of Compliance” by KPMG, supported by both of the major hedge fund trade associations- the Alternative Investment Management Association (AIMA) and the Managed Funds Association (MFA) – also found that managers were not according a high priority to EMIR. The study asked respondents to identify the regulations they felt would incur the highest compliance costs. A minority (15 per cent) identified derivative reporting to trade repositories as potentially expensive, while nearly half (48 per cent) believed it would have little impact on overheads. More than a third (37 per cent) conceded that derivative reporting would have a middling impact on their costs, especially in conjunction with mandatory clearing of swaps.

So there is one good reason why fund managers did not take trade reporting under EMIR seriously until it was almost too late. It is that other regulatory issues were more pressing priorities: compliance with AIFMD, including the Annex IV report; registration with the SEC; completion and submission of Forms ADV and PF to the SEC, and of Form CPO-PQR to the Commodity Futures Trading Commission (CFTC); plus preparation for FATCA.

The lack of urgency persisted until remarkably late. One measure of this tardiness was thei willingness of fund managers to apply for a Legal Entity Identifier (LEI), the unique alphanumeric codes that the trade repositories need to identify counterparties (see “LEIs: what they are, who needs one, and where to get one,” page 18). Despite the fact managers need one for each of their individual funds, and indeed for each managed account too, they were remarkably slow to trouble the issuers of LEIs. “If a fund manager has 20 funds, they need 20 LEIs,” said the head of operational due diligence at a major European fund of hedge funds of the time, but virtually nobody listened until 2014 was well under way.

That said, levels of preparedness did vary. “It is evident that larger buy-side firms have put a lot of resources and man-hours into complying with EMIR, whereas smaller fund managers may have been more challenged to do so,” notes Stewart Macbeth, president and chief executive officer at the Depository Trust & Clearing Corporation Derivatives Repository Limited at the beginning of this year. Initially, smaller managers had assumed their clearing broker would do the work for them, and clearing brokers are indeed doing exactly that for their favourite clients. But even some large managers had assumed – somewhat complacently, as it turned out – that their custodians would do the job for them. Custodian banks quickly acquired a reputation for cost prohibitive pricing of reporting services, particularly to small and mid-sized managers. Several managers that had outsourced their middle and back office operations to custodians were surprised to find they had scarcely prepared at all (see “Are custodians helping fund managers to report?,”). So smaller firms turned to their fund administrators instead. Higher volume managers reasoned they might as well do it themselves, since they would have to do most of the work anyway. “If a fund manager is large enough and has sufficient scale and high volumes of derivatives transactions, it could probably report directly to the trade repository,” thought Jon Anderson, managing director at alternative fund administrator SS&C GlobeOp, which helped a number of clients ensure they were ready on 12 February 2014.

Fortunately, regulators have taken a relatively relaxed attitude towards compliance since the deadline passed, provided managers can demonstrate concrete progress towards meeting their obligations. The even more relaxed timetable for back-loading of trades has helped as, paradoxically, has the fact that almost every counterparty and every type of trade has to be reported. “Regulators are going to give firms a grace period to get to grips with the data sets and formats they provide either directly to the trade repository or to their outsourced provider,” says one market participant.