The global financial messaging co-operative is a natural provider of data transmission services to the banks and broker-dealers that have long used its standardised message types to confirm and settle securities trades, and service assets in custody. Fund managers facing an EMIR compliance burden are waking up to the potential efficiency gains and cost savings of following their example.
“SWIFT is a not-for-profit co-operative,” says Joe Halberstadt, head of FX and derivatives markets at SWIFT in London. However, SWIFT is playing a vital role in the reporting by fund managers of OTC and exchange-traded derivatives to the trade repositories. It carries a great many messages across its network without knowing their content, but it can be confident they contain information necessary to report to repositories.Its trade confirmation messages, for example, are widely used across the industry already (over 6,000 counterparties use the SWIFT MT 300 confirmation messages). They are being used by derivatives counterparties to share Unique Trade Identifiers (UTIs) (see “UTIs: what they are, who needs one, and where to get one,” page 22) at the point of confirmation.
The SWIFT OTC derivative confirmation messages now also include support for all data elements required as part of the European Market Infrastructure Regulation (EMIR) technical standards. This enables financial counterparties with a SWIFT connection to use the FINInform message copying application – FIN is the core message storage and forwarding service provided by SWIFT - to send copies of trade confirmation messages directly to trade repositories. Similarly, the SWIFT Accord trade matching platform (used by about 500 entities), which has long enjoyed a substantial share of the foreign exchange, rates and metals derivatives markets, is now being used by fund managers to capture derivative trade matching details. SWIFT has added to Accord the functionality to process UTIs within confirmation messages. Since Accord is widely used in the foreign exchange markets, and by corporates and banks as well as fund managers, SWIFT is now covering a sizeable proportion of the derivatives markets.
Its fund management franchise is growing fast. No less than 567 fund managers now use the messages provided by the Brussels-based messaging co-operative to communicate directly with their prime brokers, custodians and fund administrators as well as repositories. A much larger number use the SWIFT messages and messaging network indirectly, because they have outsourced their back and middle offices to global custodian banks and other aggregators, which use them on their behalf. Custodians are reporting derivatives to repositories on behalf of their clients (see “Are custodians helping fund managers to report?,” page 88). Since SWIFT adapted its confirmation messages and matching services to derivative reporting, the number of fund managers using both increased significantly, both in the weeks before the deadline of 12 February 2014 passed, and in the period that followed.
SWIFT is also helping counterparties connect directly to the trade repositories. Users wanting to upload files of data to a repository can use a secure SWIFT connection to all the three largest repositories. The DTCC Global Trade Repository, REGIS-TR and UnaVista all support data submissions by SWIFT FileAct, which financial firms have used for years to exchange batches of structured financial messages and large reports. FileAct can be used to report all data required of all exchange-traded and OTC derivative asset classes, using any file format of any size. “That capability is of significant value to a lot of market participants in Europe because FileAct is widely used,” explains Joe Halberstadt.
However, SWIFT has gone beyond even FileAct with one trade repository. REGIS-TR – the joint venture between the Spanish central securities depository Iberclear (part of the BME Group) and the Luxembourg-based international central securities depository (ICSD) Clearstream (part of Deutsche Börse Group) - can now absorb foreign exchange derivative confirmation messages directly. In effect, SWIFT is copying confirmations to REGIS-TR, so a message a participant has to send anyway fulfils a reporting obligation simultaneously. “It is a very neat solution for a lot of people,” explains Joe Halberstadt.
“People are using an existing process to meet the challenge of reporting an FX derivative.” Belfius Bank, a Belgian banking and insurance group, was among the first to use SWIFT FileAct to report its derivatives trades to REGIS-TR. “We considered using a web service based solution to send trade details to REGIS-TR, but we opted for SWIFT FileAct because it offers better availability and reliability, allows us to send large files and enables better error handling through automated message monitoring,” says Luc Goossens, project management, financial markets, at Belfius Bank. Joe Halberstadt says SWIFT is talking to other trade repositories about adopting SWIFT FileAct for their client base as well. “We are working in close collaboration with a number of the trade repositories to provide solutions that allow their customers to confirm, match, settle and report their derivatives trades,” he adds. “We are happy to work with anyone who wants to do this with us.”
SWIFT has also played a crucial role in the generation and dissemination of Legal Entity Identifiers (LEIs). The messaging co-operative has for decades served as a financial messaging standards registration authority for the International Organisation for Standardisation (ISO), and so was a natural choice when the Commodity Futures Trading Commission (CFTC) needed to appoint a provider of LEIs to help users of swaps report their trades to repositories. In July 2012, the CFTC designated SWIFT as joint operator of what is now known as the Global Markets Entity Identifier (GMEI) utility alongside the DTCC. Known initially as the CICI utility it issued CFTC Interim Compliant Identifiers (CICIs) until the global LEI system was established last year. It now issues the LEIs that reporting entities can use to identify counterparties in derivatives trades globally, and the original CICIs have been migrated to the global LEI scheme (see “LEIs: what they are, who needs one, and where to get one,”).
SWIFT continues to generate new LEIs via the GMEI, as one of several Local Operating Units (LOUs) in the global LEI scheme. Authorised issuers of LEIs (LOUs) are expected to operate on a cost recovery basis, not a for-profit basis. The c.$200 registration fee plus c.$100 annual maintenance fee are similar for all the Local Operating Units that issue LEIs. “It is not intended to be an income stream,” says Richard Young, head of regulatory affairs at SWIFT. “It is intended to be a service to the industry.” Undeterred, SWIFT is now exploring whether it should get involved in generating UTIs and Unique
Product Identifiers (UPIs) (see “UPIs: what they are, who needs one, and where to get one,”)]. After all, its core business is carrying financial data in structured formats, so just as it was a natural extension of that franchise to modify trade confirmation message types to carry UTIs, UPIs also fit perfectly. So does the role of UTI and UPI generator. Above all, SWIFT has an established presence in the giant foreign exchange markets, and especially in the currencies that do not settle through CLS Bank, the cooperative that aims to eliminate settlement risk in foreign currency payments. “We have had requests, so issuing UTIs is something we are looking at,” says Joe Halberstadt. “The reason a number of people have approached us is because we are the nearest thing to an organisation which is always in the middle in foreign exchange, including the non-CLS Bank world. If we can solve an industry problem, we would like to do so.”