In 2009, the Group of Twenty (G20) Summit called for over-the-counter (OTC) derivatives transactions to be reported to trade repositories and made available to regulators. Now, more than a decade later, today’s global marketplace is full of fragmented reporting requirements across jurisdictions raising the cost, complexities and operational risk of trade reporting and hindering the ability of regulators to monitor and mitigate systemic risk.
Related: Are you Prepared for the Tidal Wave of Regulatory Changes?
One of the key underlying principles for global trade reporting is for regulators to be able to combine data across the globe in order to monitor, manage and mitigate systemic risk. Responding to the challenges created by differing data requirements across jurisdictions, the Committee on Payments and Market Infrastructure and the International Organization of Securities Commission (CPMI-IOSCO) came together and created a working group specifically focused on data harmonization. They developed common data standards including critical data elements (CDE), universal product identifiers (UPIs), universal transaction identifiers (UTIs), and legal entity identifiers (LEIs). Additionally, they suggested the introduction of a common reporting format, potentially ISO 20022.
Fast forward to today, almost every regulatory regime is updating their reporting requirements and beginning to implement these common data standards. However, there are inconsistences with the implementation of CDE, as well as the introduction of additional jurisdiction specific fields.
To share perspectives about these industry challenges, DTCC’s Val Wotton, Managing Director of Product Development and Strategy, Repository and Derivatives Services, hosted a panel discussion alongside industry experts including Chris Childs, Managing Director, Head of Repository & Derivatives Services, DTCC, Tara Kruse, Global Head of Infrastructure, Data and Non-Cleared Margin, ISDA, Malavika Solanki, Member of the Management Team, Derivatives Service Bureau (DSB), and Harry McAllister, Information Architect, BNP Paribas.
Incoming Regulatory Change
In November, the Securities Exchange Commission (SEC)’s security-based swaps reporting regime (SBSR) goes into effect, requiring all newly executed swaps to be reported to an approved security-based swap data repository (SBSDR), and in February 2022, SBSDRs begin public dissemination of trade reports. In outlining the new requirements, Kruse added that the third part of SBSR is probably the most challenging, requiring trade data for historical based swaps—both live and not live—to be reported, effective April 2022.
The implementation of SBSR is closely followed by a series of rewrites to existing global derivatives reporting rules. The first of a three-stage Commodity Futures Trading Commission (CFTC) rewrite begins in 2022 for swap data reporting compliance. Go-live dates for the European Securities and Markets Authority (ESMA)’s European Market Infrastructure Regulation (EMIR) Refit along with the Australian Securities and Investments Commission (ASIC) and the Monetary Authority of Singapore (MAS) rewrites are upcoming in 2023, with rewrites to reporting rules from the Hong Kong Monetary Authority (HKMA), Japan’s Financial Services Agency (JFSA) and Financial Conduct Authority (FCA)-EMIR to follow.
UPI Generation and Adoption
The UPI, which Solanki describes as part of the hierarchy that comprises the Classification of Financial Instruments (CFI) codes and International Securities Identification Numbers (ISIN) in terms of the information it contains, is designed to facilitate effective aggregation of OTC derivatives transactions and is currently scheduled to be implemented in the second half of 2022. The DSB is working with industry representation groups, regulators, standards organizations, and other participants to decide the product definition of a UPI, based on an international standard expected to be published later this year by ISO. This standard will set the baseline and minimum data elements that the product committee will then establish to then be adopted by the industry.
The DSB also has an industry group forum analyzing workflows around a UPI's technical requirements and has also held several rounds of consultation to shape what the initial service will look like. Solanki added that firms that report to a trade repository would need to know how they will get a UPI to meet regulatory requirements. “If you’re reporting somewhere, you need to think about how you’re going to incorporate these data elements.”
“The UPI will require firms to overhaul their current approach to product identification,” shares Kruse, adding that adoption will involve significant work around preparing and transitioning from current product IDs. The different timelines for adoption of the UPI, based on jurisdictions, will add complexity and cost. As other regimes adopt the UPI, it will become more useful as a general-purpose identifier. Not restricted by date, “the UPI completes the last piece of the regulatory reporting jigsaw” states McAllister.
The Journey to ISO 20022
As the data fields required for global derivatives reporting are harmonized, the adoption of the ISO 20022 message standard is expected to streamline reporting processes for firms with multi-jurisdictional obligations shared McAllister. Scheduled to go live at the end of 2022 ISO 20022 will replace Financial products Markup Language (FpML) which has long been the primary messaging standard for trade reporting.
As the industry prepares this change in message standards, Childs remarked that many clients are asking if their current tech stacks and processes are fit for purpose—and if they need to be amended, extended, or completely rewritten. As firms have had varied responses to trade reporting up to this point, they will need to analyze how they can get ready and adapt to the many changes needed for implementation.
Related: Navigating the Trade Reporting Landscape
Preparation Requires Coordination
With the regulatory change coming from multiple directions, McAllister commented that coordination between teams – from technology, to compliance, to the front office – is key for global firms to manage the slew of regime updates that are due to go live in the coming years.
Firms should analyze how these changes will impact their own reporting obligations and engage resources to translate the requirements to their own trade reporting processes. Wotton added that data analysis needs to be visible and transparent within reporting firms and industry working groups need to be leveraged to allow for prioritization.
Firms that report in multiple jurisdictions will have to update their reporting infrastructures to adapt to the swathe of revised rules, requiring careful coordination of systems and processes. Childs notes that as firms are thinking about the future of their trade reporting, they are likely wondering if they should be building or buying solutions, or a hybrid of both. DTCC’s Report Hub® service can help these firms navigate these new changes.
Achieving the Best Outcome for the Industry
Childs pointed out that the basis of the regulatory rewrites stems from reaction to guidance from CPMI-IOSCO, emanating from a 2014 feasibility study from the Financial Stability Board. The study stated that harmonization was required to enable greater data aggregation and this round of rewrites and refits is a huge step forward to achieving these harmonization goals.
Recent analysis suggests that of the 110 CDE that were in the IOSCO guidelines, 51 will be universally and consistently adopted by all regulators. Childs shared, “We do believe that if amalgamation is required in the future, the 51 elements that are universally adopted have most of the data that is required for systemic risk analysis and that is a huge step forward.”
Childs commented that DTCC, like ISDA, continues to engage with regulators to pave the path towards harmonized data standards in global derivatives reporting. “There will be much work for the industry over the next few years. Harmonizing these rules to see how amalgamation could work, as data sharing, governance and technology all come into play to be able to take data sets across jurisdictions, is the goal” he concluded.
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