The short answer to this is: everyone. From 12 February 2014 all derivatives counterparties were required to report details of any contract they have concluded - or which they have modified, novated, terminated or partially terminated - to a registered or recognised trade repository within no more than a single working day. That includes counterparties who are not involved in financial services.
Even the non-financial counterparties that can escape centralised clearing of swaps (until 2015) because they are hedging commercial or treasury risks must comply with the requirements of the European Market Infrastructure Regulation (EMIR) to report their transactions to a trade repository. Only individuals, counterparties outside the European Union (EU) and – importantly, given their extensive use of derivative instruments – European central banks and State debt management agencies do not have to report their derivative trades.
Though the authorities possess data about their derivatives activities already, there is a view that this exemption is a mistake. “We just will not get a clear picture of who is trading with whom if central banks are excluded from trade reporting in Europe,” says Thomas Krantz, senior advisor, capital markets, at Thomas Murray Investor Data Services. “They are major actors in today’s financial markets and reporting of their positions would aid the intended outcome of increased transparency.”
Everything has to be reported too. In introducing swap trade reporting to Europe, the framers of EMIR went for the all-encompassing approach. Other jurisdictions that have implemented the Group of 20 (G20) mandate to capture data on derivatives transactions – notably the United States, via the Dodd-Frank Act – focused on the OTC transactions that were held partially responsible for causing the financial crisis of 2007-08. Europe, by contrast, has included exchange-traded derivatives as well.
Equity, interest rate, currency, commodity, credit and “other” OTC derivatives, and all exchange traded derivatives, are captured, wherever they are traded and whatever the underlying asset class. There are no exemptions for index or basket products, and even retail derivatives such as spread bets are caught. The only asset class exempted is exchange traded warrants. In Europe, there is not even a threshold below which derivative transactions do not have to be reported.
Two other factors underline how difficult it is for European users of derivatives to escape the responsibility to report derivatives transactions. The first is dual-sided reporting. In the United States, only one side of a trade has to report it on behalf of both parties, but in Europe both counterparties are obliged to report. This has made it relatively straightforward for buy-side users of derivatives in the United States to outsource the task of reporting to their clearing brokers, but in Europe this service tends to be reserved for larger or more remunerative clients.
Secondly, the responsibility for reporting always lies with the ultimate counterparty. Even if the task of reporting is delegated to a third party, such as a clearing broker or trading platform or central counterparty clearing house (CCP), the responsibility for mis-reporting or non-reporting always lies with the end-user. To ensure that reports are correct, third parties will always seek clearance from the counterparty prior to submission. In other words, clients must check what is being reported on their behalf, so they can identify any errors.
This means that, even for fund managers which have outsourced their back and middle offices functions to custodian banks, reporting derivatives trades is a nontrivial undertaking. Many buy-side firms have chosen to manage the reporting themselves, precisely because they recognise that the ultimate responsibility for getting it right rests with them. A number of the larger fund managers that have outsourced their operations to global custodians were surprised to find that their provider had no workable solution (see “Are custodians helping fund managers to report?,” page 88).
Trade repositories of course share the data they collect with regulators - “national competent authorities,” as the Euro jargon has it – but widespread expectations that its sheer quantity will bury their ability to comprehend it are probably misplaced. True, the weekly swaps market report published by the Commodity Futures Trading Commission (CFTC) did run into technical problems that prompted the regulator to confess in December that it had under-reported the size of the market.
It is not yet clear what the European Securities and Markets Authority (ESMA) plans to publish but, since swap market participants in the United States began to report to the three American trade repositories – the CME Group, Depositary Trust and Clearing Corporation (DTCC) Data Repository and the ICE Trade Vault – in January 2013, the CFTC has incorporated some of the data into a weekly CFTC Swaps
Report that is disseminated to the market. It offers figures on gross notional outstandings, transaction dollar volume, and transaction ticket volume across interest rate and currency swaps, credit default swaps (CDS), and foreign exchange, equity and commodity swaps.