London Stock Exchange Group’s regulatory reporting arm is capitalising on its established position in MiFID reporting in the largest international financial centre in Europe to seize a sizeable share of the market in EMIR reporting, as the foundation of a global franchise covering alternative investment funds as well as exchange-traded and OTC derivative and cash market trades.
The principal competitive advantage of UnaVista is not hard to spot. It is that the organisation is already the largest Approved Reporting Mechanism (ARM) for firms regulated by the Markets in Financial Instruments Directive (MiFID). UnaVista is currently processing 1½ billion trades a year on behalf of over 700 MiFID-compliant clients, with the potential for even more on behalf of clients subject to REMIT energy trade reporting and Annex IV of the Alternative Investment Fund Managers Directive (AIFMD). That makes UnaVista the logical choice for those that are using its services already. “We are not just a provider of EMIR trade repository services,” says Mark Husler, global head of product management, information services, at London Stock Exchange Group. “We are a regulatory solutions provider.” David Nowell, head of industry relations and regulatory compliance at UnaVista, describes the European Market Infrastructure Regulation (EMIR) reporting service as “a further configuration of our existing MiFID platform.”
Nevertheless, it would trivialise the scale and complexity of delivering the EMIR reporting service to see it as no more than an addition to a tried and trusted platform. The 85 fields demanded by an EMIR report are more than three times as many as the 26 fields of a MIFID report. The reports span exchange-traded as well as OTC derivatives, and the exchange-traded variety has developed identification methodologies that have somehow to be melded with the habits of what is likely to remain a bi-lateral market for some years to come, without much clarification from the regulators.
MiFID also requires executing brokers to report exchange traded derivative trades in those cases where the executing broker differs from the clearing broker, while EMIR has shifted this responsibility from executing brokers to clearing brokers. Such differences are not accidental. MiFID II – and in due course, the Markets in Financial Instruments Regulation (MiFIR) – are aimed mainly at market abuse, while EMIR is aimed largely at managing systemic risk, in which case a clearing broker is a more logical source of information. It nevertheless complicates the task of building reporting tools.
When EMIR reporting began on 12 February 2014, several of the celebrated 85 fields were short of regulatory clarity and UnaVista had to work on the assumption that it had interpreted the intentions of the European Securities and Markets Authority (ESMA) correctly. Tests of the EMIR reporting service, which had commenced in May 2013, had gone well. The important question, as for every provider, was the readiness of the great mass of sell-side and buy-side clients that had not taken part in the tests. “Some of our sell-side clients were completely on top of everything,” says Nowell. “In fact, some of them were in as good a state as they possibly could be, but obviously some were in better shape than others. Some kept up with the industry recommendations better than others, and some were well aware of the current state of the guidance from ESMA.” The substantial differences in readiness really lay between sell-side firms (most of which were well-prepared) and buy-side firms (many of which were mistakenly counting on brokers and custodian banks to do the job for them).
For those sell-side firms that are happy to report trades on behalf of their buy-side clients, UnaVista has developed a set of full and partial delegation services, and a common data delegation service as well. It has also taken on position reporting, which is an entirely new concept for most buy-side firms, but one now available as an option if they have reported the trades as well. Unsurprisingly, UnaVista has noticed that some brokers are being choosy about which clients they are willing to support. “As long as sell-side firms can work out exactly what they want to offer their clients, we can deliver that to them,” says Nowell.
“Many of them dislike the regulatory risk that the job entails, especially the obligation to complete fields that relate to commercial activity and intra-group transactions which may not be known to the sell-side firm. There has to be a flow of information from the fund manager to the sell-side broker, who may not necessarily have all the information.” Naturally, this sell-side caution complicated the work of UnaVista ahead of the 12 February 2014 deadline in identifying those buy-side users that could count on a sell-side firm to report everything for them (full delegation) and those that would rely on a sell-side firm to populate some fields only (partial delegation). This mattered, for the obvious reason that under EMIR, unlike Dodd Frank, both sides of a trade have to report – but one can report the data that is common to both of them.
UnaVista came up with a solution that takes that logic a stage further. “It is true that under EMIR both sides have the obligation to report, but one side can still satisfy that obligation by reliance on a third party,” explains David Nowell. “There are two sets of data. One set is particular to each counterparty, and one set is common to both counterparties. It is an option for the buy-side to report the counterparty data set and rely on the broker to report the common set of data on their behalf, but we are taking that one stage further. We allow the sell-side broker to report absolutely everything on behalf of their buy-side clients.” As it happens, UnaVista is taking reports directly from a large number of fund managers. They appointed UnaVista as their preferred repository relatively early in the process, and so were in a high state of readiness by 12 February. But Nowell says the same was not true of managers that left the appointment of a trade repository to the last minute. “We were aware that there were quite a few buy-side clients who had not signed up with anybody to report, and they may be caught in the gap between delegated reporting and having to report themselves,” says Nowell. “They may have thought they could rely on a sell-side broker, but their sell-side broker may not actually be willing to offer delegated reporting for them.”
Interestingly, there is no pattern to the shape or size or level of sophistication of the fund managers that are already reporting directly to UnaVista on behalf of their funds (the obligation to report falls on the fund and not the manager). “Some managers are extremely comfortable working with us, because they are using us already for MiFID reporting,” explains Nowell. “They are confident about carrying that relationship on into EMIR reporting. We are a trusted solution. They are used to our web-based user interface, and the management information we send back to them. Anybody who has used us as a MiFID reporting solution knows exactly what they are getting.” Some fund managers are delivering reports to the data specifications set out by UnaVista, while others are relying on the UnaVista Rules Engine to map and translate the data they send into the right format.
These services sell at different prices – a full price schedule can be found on the UnaVista web site - but the Rules Engine is flexible enough to work with any digital format, including spreadsheets. “We cannot work magic, but by working with them to map their data to the 85 fields, we can accept pretty much any electronic format,” says Nowell. “We are formatagnostic. We can take their data, and provide mapping and translation tools to transform it into what we need to store it.” He points out that delivering data via the Rules Engine inevitably means the on-boarding process can take longer than submitting it in a prepared format via the hosted web interface. The UnaVista MiFID support team has also had to be expanded to handle questions about EMIR reporting. Clients have long attended examination-based CPD certified MiFID training courses run by UnaVista, and will soon start attending the EMIR equivalent.
It is a comprehensive course, since the UnaVista service covers all exchange-traded and OTC derivative asset classes, from futures, through equity swaps and FX forwards, to weather and trading emission contracts. “The foreign exchange derivatives have proved the most difficult asset class to accommodate,” says Nowell. “There are a number of very similar fields for FX, so it is not always obvious which fields need to be populated and which ones do not. It is extremely difficult to fit an FX swap into an EMIR template, because it has two legs. It may be that two reports are needed for a single FX swap, which then have to be matched through the UTI, which obviously makes it more complicated. We would hope that both legs are reported to UnaVista.” He adds that commodity derivatives, which often have two legs, present similar problems. It is the kind of anomaly that everybody expects to disappear as the reporting systems and procedures bed down over the coming months.
“At this point in the journey towards full and effective implementation of EMIR, there is still a lack of clear regulatory standards in some areas,” says Mark Husler. “Unlike MiFID reporting, where the regulators provided a detailed technical specification in the shape of a transaction reporting user pack, or TRUP, that told firms exactly how they should report, many of the technicalities of EMIR reporting in different trading scenarios and asset classes remain unresolved, and will take a long time to sort out. Without a TRUP, it is down to the trade repositories to interpret some of the information. Our interpretations, of course, create differences, and differences will inevitably result in mismatches.” That lack of clarity is the price ESMA has paid for a commendably consultative approach, in which market participants as well as regulators and trade repositories have buried the organisation in feedback, but it did make it impossible for repositories and counterparties to agree well in advance what needed to be reported and how. “It is not just the interpretations of the trade repositories that lead to potential mismatches,” says Nowell. “It is the interpretations of the reporting counterparties as well.” Husler predicts that, as the mismatches accumulate, regulators will define the technical standards and publish a TRUP equivalent for EMIR as well, finally removing all ambiguities.
But he accepts that, until all repositories are operating to a single set of technical standards, it will remain difficult to match both sides of some trades. “We have spoken to our local regulators, and to ESMA, and they do recognise there is a need for further progress on standardisation,” says Husler. “At the moment, some of the key matching fields lack the necessary degree of clarity in terms of standardisation, so there are going to be a significant number of exceptions until a final set of standards is agreed.” In his view, the next 18 months will see firms as well as regulators working together to evolve a combination of formal standards and what he calls “natural working practices” to overcome the data mismatches that lead to exceptions. To manage those exceptions, the UnaVista technology sets acceptable levels of tolerance for mismatched data fields. “You should not try to match every single attribute, or everything will be an exception,” says Husler. “But we need the regulators to engage, and let us know which fields are acceptable for a tolerance match, and which fields need a perfect match. It takes time to evolve these standards, so it will be many months after 12 February before the issues are resolved.”
An inter-trade repository working group is already working on common standards for key fields. This is a natural sequence of events, argues David Nowell. As he points out, trade repositories are under a legal obligation to match the trade data sent by counterparties so, if an exception arises, trade repositories will have to liaise with each other and deal separately with each counterparty if each party to a trade sends its data to a different trade repository. “That is why we have established links with all the other five authorised repositories,” he says. It was in expectation of a high level of exceptions in the immediate aftermath of 12 February that the Financial Conduct Authority (FCA), the United Kingdom securities regulator, openly signalled to the market that it would be pragmatic rather than perfectionist, provided all parties were taking the project seriously and making substantial investments and concrete progress towards effective fulfilment of the objectives set by EMIR. After all, unlike the phased approach adopted by the CFTC in the United States under Dodd Frank, ESMA adopted a Big Bang approach which saw all exchange traded and OTC derivatives traded by virtually any kind of counterparty subject to reporting from 12 February 2014.
To help its clients get data into the repositories, UnaVista offers trade routing and matching services as well as translation services to translate client data not only into its own trade repository but into those of its competitors too. The firm also offers pre- and post-trade reconciliation services. Obviously not all clients use UnaVista for all of these functions. The firm works with third party providers preferred by their clients, including clearing brokers offering full or partially delegated reporting, vendors such as Markit that provide routing services to trade confirmation platforms, and organisations such as TriOptima and Traiana that sell reconciliation services that can feed reconciled data back into the systems of the counterparty as well as the trade repository.
UnaVista is happy to help customers that use other repositories. ”Some of our customers really value our translation technology, but have a natural or strategic preference to route their trades to, for example, DTCC,” explains Husler. “We facilitate that transportation. We are horizontal rather than vertical in our model. We are open to competition but also responsive to client needs and preferences, so if they want us to route to a competitor trade repository, that is something we support.”
Geographically, the UnaVista EMIR reporting service is currently being offered throughout the European Union. “We have seen growing interest in some of the smaller countries because, even if they are not ready on day one, they have to demonstrate that they have plans in place,” says Husler. But the ambitions of UnaVista are global rather than European. In those jurisdictions implementing the derivative reporting component of the Group of 20 (G20) agenda, such as Australia, Hong Kong, Japan, Russia and Singapore as well as North America, the company aims to sell its services. “Our model is that, if you want a strategic solution rather than building tactical fixes for each region, we can consume your transactional data, apply logic and rules to it, determine which regulations you should be adhering to, translate the data into the right format, and disseminate it to either a local regulator or a trade repository,” says Mark Husler.
The need for translation capabilities is a reminder of the technical differences between different jurisdictions, which require constant vigilance and analysis to adapt to the shifting regulatory requirements in different countries. “It is a big opportunity for solutions providers, if they get it right,” says Husler. “It is also a big opportunity for consultants, because there is a lack of information out there.” UnaVista is even able to help managers obtain the Legal Entity Identifier (LEIs) that are essential to reporting successfully. Its parent company, the London Stock Exchange (LSE), is authorised as a Local Operating Unit (LOU) to issue LEIs. The role is a natural one for the LSE, which has functioned as the local agency for the issuance of ISIN and global SEDOL numbers for decades. In fact, MiFID reports do not use LEIs, but rely instead on FCA Reference Numbers (FRNs) or Bank Identifier Codes (BICs) for counterparties and ISINs for instruments. This created a degree of complexity which added to the difficulty of getting reporting right on 12 February 2014. The LSE had also to cope with a flood of last minute applications for LEIs from all over the world in the weeks ahead of the 12 February 2014 deadline.
Even so, it reckoned the number was still worryingly low by the time reporting got under way. Even though sell-side firms are allowed to apply for LEIs on behalf of their buy-side clients, the number of LEIs issued appeared to be well below the anticipated requirement if all affected organisations were to comply on time. By 12 February 2014, less than 100,000 LEIs were issued for EU entities, against an estimated need measured in the hundreds of thousands (see Table 1, page 19). “It indicated that significant volumes of clients that had not taken the step of obtaining an LEI, and were therefore unable to report their trades by the deadline, and brokers were unable to report trades on their behalf, because the LEI has to be in place first,” says Husler. “Many firms were not going to be able to report on day one, and for many months after the go-live date we will only just be starting the engagement process. The 12 to 18 months after 12 February 2014 promise to be an extremely busy period.”
All reporting counterparties must be identified with an LEI. But if LEIs are behind schedule – and David Nowell calls the LEI the “easy data standard” - the identifiers for the trades (Unique Trade Identifiers, or UTIs) (see “UTIs: what they are, who needs one, and where to get one,” page 22) and products (Unique Product Identifiers, or UPIs) (see “UPIs: what they are, who needs one, and where to get one,” page 26) being traded were possibly more difficult to interpret by the time reporting began in earnest on 12 February. “UPIs await further clarification,” says Nowell. In EMIR, three taxonomies are proposed. The first is the UPI endorsed by ESMA, which was not agreed and unavailable by the time the 12 February 2014 deadline passed. In exchange-traded derivatives, the effective choice was between an ISIN and an Alternative Instrument Identifier (Aii), though ESMA did not fully clarify which derivatives trading platforms would issue ISINS and which Aiis until one day before go-live. It gets worse. There is no UPI, ISIN or Aii at all for OTC derivatives. For exchange-traded and OTC derivatives, a further identifier called a Classification of Financial Instruments (CFI) identifier needs to be populated.
Allocation of the CFI is traditionally undertaken by the National Numbering Agencies and it may prove difficult for reporting firms to formulate the CFI and match it with their counterparty. It follows that firms reporting trades need to know exactly what identification labels to pin on what parts of their reports. “It is key for firms to have a good, reliable source of reference data,” explains David Nowell. “Access to good reference data is essential.” As a national numbering agency, UnaVista issues CFIs and collects them on a global scale before making the information available to clients. The eventual hope is that a fully functioning UPI enables trade repositories to dispense with the combination of ISINs or Aiis and CFIs for exchange traded derivatives, but Mark Husler predicts that it will take “many, many years for the regulations to tighten up” even on the narrow question of identification codes. “Standards do exist in high volume, exchange-traded derivatives, even if they are not the International Standards Organisation (ISO) standards that we would prefer,” he adds. “But in bi-lateral OTC contracts there are still no standards at all.” When reporting started on 12 February, OTC market participants had to use an interimtaxonomy which stated merely the type of derivative and the underlying asset class. “It does not break it down to any more granular level than that,” says David Nowell.
When it comes to UTIs, ESMA says only that the two counterparties have to agree on one. Despite extensive discussions at ESMA, and by industry working groups, no standard methodology for generating and adopting UTIs was endorsed by the time reporting began on 12 February 2014.Yet the UTI was vital to the success of the entire initiative. “UTI is the glue that enables us to tie the two parts of the same transaction together,” explains Nowell. Candidates for the role of generating UTIs include central counterparty clearing houses (CCPs) for cleared transactions and derivatives exchanges and swap execution facilities, once they are implemented in Europe by MiFID II, currently expected no earlier than 2016. The only alternative is of course the counterparties to a trade themselves. “There is no one size fits all solution,” says Husler. “Exchange-traded derivatives are cleared, so UTIs could be issued by either the exchange or the clearing house. But if it is an uncleared, bi-lateral OTC derivative, the counterparties are the only people who can agree a UTI. Also, some counterparties want to control the generating UTIs, while others do not. UTIs are another field in which the solutions are going to evolve over time.”
Exceptions – unmatched halves of the same trade, albeit in the key fields rather than all 85 – were fully expected, and did occur on and after 12 February 2014. “It is not the job of the trade repository to fix the exceptions,” adds Husler. “It is the job of the trade repository to match trades where possible, and provide exceptions back to the counterparty. One of the advantages of our technology is that we are very strong at exception management, and have an outstanding GUI to present exceptions back to clients, so that they can resolve exceptions in a timely fashion.” For some time, however, it will be the job of the trade repositories like UnaVista to live with a degree of unpredictability. Husler says the company is used to it. “Even seven years after MiFID I went live, there is still a lot of confusion over what is reportable and what is not,” he explains. “That comes from interpretation of the rules on which markets need reporting and what identification codes should be used.” For now, that means that even in a field as basic as the counterparty identification code, MIFID and EMIR reports will continue to differ.
If that makes it probable that the end-objective of the entire trade reporting initiative - better understanding by regulators and central bankers of the systemic risk created by the trading of derivative instruments - recedes into the future, responsibility for that lies far beyond the trade repositories. Mark Husler says it is not part of the role of the repositories to decide what the regulators should do with the data they receive. “We have an obligation to provide this data to local regulatory authorities and ESMA,” he says. “There is an on-going dialogue between ESMA and the trade repositories around the standards as to how that should be presented. It goes without saying that, as it is a mandatory requirement, as a trade repository we will be providing relevant data to the competent authorities.”
But there is one sense in which the repositories are drawn into the debate over what the regulators will do with the data, in the operational if not the political sense. As David Nowell points out, not all regulators are allowed to see the same information, so trade repositories have to draw distinctions between what each delivers to each regulator. “We have to understand what their mandates are, and what they are allowed to see,” he explains. The most notorious limit, of course, is the one on the despatch of European data to American regulators. This is an increasingly sensitive point following the decision by payments co-operative SWIFT to share data with the American regulators. Since the purpose of the reports is to manage the systemic risk allegedly created by derivative instruments, regulatory chauvinism on this point seems peculiarly self defeating. Mark Husler predicts that regulators will eventually be forced to find appropriate “sharing mechanisms.”