COO: What are you doing to help fund managers meet their EMIR reporting requirements?
French: For the 12 February go-live date for EMIR trade reporting, we supported foreign exchange, equity swaps and exchange traded derivatives. That was our offering for the commencement of the mandate, but we have assessed client demand since the go-live date, and we are going to be supporting new asset classes in the coming months: interest rate swaps, credit default swaps and commodities. So that means that we will be supporting all of the EMIR asset classes. Our service encompasses the day one requirement for trade reporting and we have already built out to incorporate the forthcoming requirements for valuations and collateral, starting on 11 August 2014.
COO: What sort of clients are using your EMIR reporting services?
French: We have a broad mix of clients. Traiana has a long history in foreign exchange, where we have an incumbent network of executing banks, and prime brokers, and buy-side clients in the form of traditional asset managers and hedge fund managers. So we have offered a number of services to them as well as to market participants using our equity and exchange traded derivatives services.
COO:Traiana is active in the United States as well. What lessons did you learn there?
French: Under the Dodd-Frank Act, there is a requirement for the executing banks to generate Unique Swap Identifiers (USIs) and share those with FX prime brokers. One of our services, Harmony, was used to do that. Around 40 banks used our service under the Dodd-Frank mandate in time for 18 February 2013. All of those banks are allowed, under the International Swaps and Derivatives Association (ISDA) guidance, to use the unique swap identifier as a Unique Trade Identifier (UTI) (see “UTIs: what they are, who needs one, and where to get one,” page 22) under EMIR. So we are definitely offering this service to the banks – they might not be using us for the direct reporting, but the key aspect of this is that Harmony is absolutely essential for a number of asset classes, especially - given the complexities of foreign exchange - for the sharing of USIs, the generation of USIs.
COO: Is Harmony being used for reporting as well?
French: When it comes to the reporting itself, the service is being used by executing banks and clearing brokers. Some are using it for their own reporting if they fall under the EMIR requirements themselves – in other words, if they are domiciled in the European Union (EU). Banks and brokers are also using the service for delegated reporting on behalf of their European clients, irrespective of whether they are domiciled in the EU. That includes American, Australian and Asian banks and clearing brokers. Obviously, clearing and prime brokers can use our service to generate the UTIs and to relay those UTIs to their clients, so that the clients can do their own reporting. In addition to the sell-side, we are working with asset managers, hedge funds, corporates and, in the foreign exchange space, retail platforms that are generating millions of reports as a result of their spot transactions. We also work in conjunction with some third party aggregators who are themselves offering services to retail clients.
COO: Do you offer a delegated reporting service yourselves?
French: We need to clarify the interpretation of ‘delegated’ here. Under the EMIR guidelines, delegated reporting requires a formal agreement between the client and the party offering that delegated reporting service. We are not doing that. We do provide infrastructure to counterparties and third parties that want to do that. We do not use ISDA agreements. We have our own agreements. Any bank, or client, or market participant, can use our service for reporting, but they are not delegating the responsibility to us. They are just using us as a facility. We provide the plumbing down to the trade repository, but if Client X has delegated reporting to Bank Y, it is Bank Y that is putting all of the data together on behalf of the client, and then sending its own and its client’s data on to the repository. The delegated reporting agreement is between the client and the bank. What we are doing, if a client delegates to Traiana, is providing them with a licence to use our service so that they themselves can honour their own reporting obligation. They are not delegating the duty to us.
COO: Which trade repositories does your service have connectivity with?
French: On day one we provided connectivity to four: REGISTR, UnaVista, CME and DTCC. In the future, we will also be offering connectivity to ICE Trade Vault and KDPW. Our policy is to connect to all trade repositories, in all jurisdictions where we have demand from our existing client base and from new clients as well, as we roll out across the remaining asset classes.
COO: What are the biggest challenges that your clients are facing in order to be compliant with the
EMIR trade reporting mandate? French: The first major challenge was simply for them to understand what they needed to do. Once they understood this, the next challenge was to select a trade repository to report to, based on a number of parameters, including things like pricing and the different models on offer. Those that did not wish to connect directly to a repository have been looking to their counterparties to offer a delegated reporting model. What we have seen as a result is a number of different service levels in the market, depending on who the counterparties are. In a simple case, a broker might have a buy-side client that is trading on a single platform for foreign exchange, and they can get all of their UTIs generated and relayed to them by that platform, and they can then do their own reporting.
Other clients might have a small number of counterparties, and rely on their custodian to do the delegated reporting for them. Further up the scale, large hedge funds and traditional asset managers are deciding to do the reporting themselves. In short, clients are looking for a single solution, but they can be left with a patchy service, depending on which asset classes they deal in and who their counterparties are. That is the biggest issue facing them.
COO:What was the biggest challenge you faced ahead of 12 February 2014?
French: The biggest challenge in getting ready for 12 February 2014 was the well-publicised lack of clarity around the population of some of the reporting fields. The next challenge was in the timeliness of the trade repositories in taking on board the latest guidance from the regulators and implementing the necessary changes. As late as 4.00 p.m. on 11 February 2014, ESMA issued another set of guidelines on certain fields and on UTI constructs. The industry in general has been hamstrung by the lack of clarity. That was the biggest issue for the whole industry, not just Traiana.
COO: Do you prefer clients to generate a certain volume of business?
French: No, we do not limit ourselves, based on metrics such as volume. Our commercial model is not typically based on the number of trades executed by a client. The trade repositories have a tiered pricing level based on volume, but we only use it as a metric in certain circumstances. For example, if a client is reporting one million trades per day, then we need to take a closer look at how we can do that. But we will not be pricing out corporates because they only do one trade per month.
COO:How many clients did you sign up ahead of 12 February 2014?
French: As the deadline approached, we were supporting several hundred clients across the different banks, by a mix of the delegated and direct client connectivity that we manage for them. Some of our banking clients have several hundred clients themselves. The clients of the banks connected to us through the banks, and the bank used our infrastructure, so the bank was offering a pure delegated service via Traiana. In terms of clients coming direct to us, we had around 50 clients that selected us ahead of the deadline. We also built up a pipeline of prospective clients that had actually contacted the trade repositories, but the trade repositories have not been able to process their requests for connectivity. We could not do anything for them because they had not heard back from the trade repository on their submission for a licence. There was a backlog and no one could help them. From the point of the regulator – or at least of the Financial Conduct Authority (FCA) in the United Kingdom – they were not non-compliant as the deadline passed, because they had a clear plan in place and are taking positive steps towards compliance.
COO: Has your business grown rapidly since the deadline passed?
French: We have had approaches from a number of individual corporates. Often, they have been offered delegated reporting, but can find themselves in a hole for reporting against, say, a Norwegian or a Swiss bank that is not caught by EMIR and has taken the decision not to provide a delegated reporting service. In such cases, corporates find 90 per cent of their reporting is covered by a delegated model, but the remaining 10 per cent is not actually being reported, and they are left to look for their own direct reporting solution.
: Do you cover Asia?
French: We started off reporting FX derivatives under Dodd-Frank last year, and we have since expanded that service to support reporting under the Australian Securities and Investments Commission (ASIC) in Australia, and the Hong Kong Monetary Authority (HKMA). The ones that are in our sights going forward on a cross-asset basis include the Monetary Authority of Singapore (MAS), the Financial Services Agency (JFSA) in Japan and other mandates that are being drawn up in Canada, Switzerland and Norway. We aim to cover all reporting jurisdictions and all trade repositories.
COO: What particular challenges has Europe presented?
French: Dual-sided reporting does make it more complicated by comparison with the United States, which is single-sided. Australia went with the United States model for a year, but will move in October 2014 to a dual-sided model. Hong Kong was initially single-sided but will also be moving to a dual sided model. Singapore is still single-sided at this time. So the complexities are two-fold. The sharing of Unique Trade Identifiers (UTIs) prior to submission by both parties has also been a major problem in the implementation of EMIR. An essential part of the work that we have done in our Harmony product is to promote the sharing of USIs and UTIs between counterparties. This will be a key area for those jurisdictions that have started off down a single-sided track, because it will make the switch to dual-sided reporting as seamless as possible.
COO:Were you able to assist clients in assigning UTIs to their back-loaded reports?
French: We do an element of UTI pairing, but the majority of this is performed by our sister company, TriOptima. We did not go into the market to compete with them, obviously, but we do offer a back-loading service and have the ability to pair UTIs in this.
COO: Did back-loading cause you many problems?
French: Only from a capacity point of view. People had to gather their historical data, and send it over, and then it was down to the readiness of the trade repositories. Most of them were up and running and able to receive the historical data a couple of weeks ahead of the deadline. So we did not see any real problems. In fact, I think that it was a good way to get people geared up for real-time reporting. It was good practice for market participants in getting to grips with the requirements and with how the systems actually work.
COO: Even as the deadline passed, there was still a lack of clarity around certain aspects of trade reporting in Europe, even on the definition of a derivative (see “EMIR meets MiFID,” page 100). Was that a problem for you?
French: The main concern about the definition of a derivative arose in the FX space, and particularly around rolling spots. Different regulators offered different guidance. Many of our retail platform clients understood that they needed to report their rolling spots, which created a huge volume of trade data that was reported through our system. The European Securities and Markets Authority (ESMA) has since requested further clarification of the definition, so that it is agreed across all of Europe and that there is a harmonised approach to this. Our guidelines are that clients should carry on reporting everything, unless it is a pure spot, and then they will not be in breach of any of the regulations or regulatory interpretations.
COO:What sort of volumes have you been processing since the mandate went live?
French: We have had single clients sending us something in the order of half a million trades per day. This is coming from a single retail FX platform that we are working with. The projections for some of our platform FX clients is for around one million trades per day going forward. By contrast, some of our corporate clients may only be doing 15 swap transactions a year. So there are real differences in volume across our clients.
COO: Looking forward, what is your biggest challenge?
French: The problem of UTI sharing remains. I am sure the lack of clarity over the definition of FX derivatives, and ongoing concerns around how to populate some of the fields, will continue to run. Coming up on the horizon are some issues which can seem a long way off, but will be with us sooner rather than later. These are the next phases of trade reporting – namely collateral posted and valuations, from 11 August 2014. Any bank offering a delegated reporting service will need to consider carefully whether it can offer the same delegated reporting service for collateral. They have a lot of the information in-house required for collateral reporting, but they almost certainly will not have the mark-to-market information to value collateral for each and every client.So the next big challenge will be whether or not banks will continue to offer a delegated reporting service to their clients, to include valuations and collateral. If they do not, what will the clients do? Looking ahead even further than that, there is the upcoming clash between EMIR and the Markets in Financial Instruments Directive (MiFID II) and the accompanying Markets in Financial Instruments Regulation (MiFIR). There is already confusion around what that means. There is also a separate reporting requirement under MiFIR that will have to be dovetailed into EMIR. That will be a big challenge.Regulators and service providers need to make sure that the industry knows what that means and what changes will need to be made to the existing EMIR reporting to comply with MiFIR. Of course, Traiana will be offering reporting services for MiFIR. We do not offer reporting services under MiFID today, but we will be under MIFID II, MiFIR and other regulations, such as Regulation on Wholesale Energy Markets Integrity and Transparency (REMIT).
COO: Were you surprised by the chaos which followed 12 February 2014?
French: In the end, most market participants got over the line with EMIR reporting. There will be a time to review how it went and what could have been done better individually by the banks and by the clients.