Gregg Rapaport, DTCC Managing Director, Strategy and New Business Development, was a panelist discussing the topic “What’s Next in Trade Reporting” at IHS Markit’s Next-Gen RegTech 2020 event on October 22. Here, Rapaport, who played a key role in developing DTCC’s Trade Information Warehouse (TIW) and its Global Trade Repository service (GTR), recaps his views on the lessons learned from eight years of OTC derivatives transaction reporting and the reforms needed to enhance reporting going forward.
After nearly a decade of experience navigating the evolving rules and mandates across regulatory jurisdictions around the world, market participants have amended their views of the trade reporting process. In my conversations with large and medium-sized banks, buy-side firms, central counterparties and others, no longer do they see the process as a “one and done” – trade reports are submitted; regulatory compliance is achieved.
Instead, they have learned it is a continuous and circular process requiring ongoing communication between the firm and its various partners involved in its trading activity – vendors, execution agents, etc. Reconciliation of trade records with counterparties and resolution of trade breaks are essential to trade reporting. The work of tracking down the root cause of breaks has become embedded in the reporting process and provides essential quality control. It’s now a key element of best practices for trade reporting.
Firms have also come to understand that reporting is a two-way process in which their books and records are reconciled to a trade repository (TR) and the TR is reconciled to their books and records.
What do these complexities mean for firms? Trade reporting is expensive. For banks internally, reporting is not a value add. It’s a compliance process to provide information to regulators for monitoring market and systemic risk. And, just like the reporting process itself, the costs to banks are not a one-off but an ongoing incurrence of expenses. For that reason, as firms have also learned, finding ways to reduce these costs is a priority.
More Reg Changes Ahead
Trade reporting rules have undergone frequent updates, modifications and expansions over the past eight years. Will this rapid pace of change ever slow down?
I believe we’re now entering a brief period of calm before the storm starts churning again in 2022. Look at the changes that are already scheduled: a CFTC rewrite in 2022, SEC reporting which may go live in 2021 under the current CFTC rules and then move to the new rules in 2022, rules changes in the APAC region, the EMIR Refit sometime in 2022. And don’t forget UPI [unique product identifier] implementation slated somewhere in 2022, which will affect numerous data fields across all the jurisdictions.
With all this reform landing simultaneously, 2022 is likely to be the busiest year yet for regulatory reporting. All players globally – DTCC included -- will be challenged to manage the complexities and I see them using 2021 to prepare, by retooling infrastructure as needed to be able to implement changes quickly.
Improving the Data
These regulatory changes increase costs and operational burdens for the industry. But regulators can also lead the way to promote good-quality data, thereby helping banks and other financial institutions perform their reporting.
First, regulators should adopt the CDE [critical data elements] as laid out by CPMI-IOSCO. Individual jurisdictions should choose all of the data elements to include in their reporting with any additional jurisdiction specific fields limited to those absolutely necessary. Otherwise, the result will be a “shadow” set of nonstandard data elements that will continue to make reporting costly and burdensome in that jurisdiction. If two or more jurisdictions want to add the same elements, the CDE should be amended with those additions.
More standardization around what is deemed public data and the ability to use it would also enhance data quality. In several jurisdictions DTCC currently produces public data that is the stock of outstanding trades as well as weekly volumes. Some of these jurisdictions exclude large trades from this stock on the grounds they may be incorrect, but others do not. Similarly, some jurisdictions include real-time data but don’t show the whole portfolio of trades. These differences make it impossible to get a global view of all data. And, even if you had a global view, there’s the problem of the same trade being reported in multiple jurisdictions. De-duplicating that data is difficult but is one of the things that needs to happen to get a true global view of systemic risk even as we improve data quality.
While global harmonization of reported data and reporting processes is a goal everyone shares, as we’ve seen too often, having good regulatory intent isn’t enough to ensure the desired outcome. There is a need for closer regulatory interaction. Foundational to this effort to enhance data quality through harmonization and standardization is the consolidation of oversight of LEIs [legal entity identifiers], UPIs, UTIs [unique trade identifiers] and CDE under the ROC [Regulatory Oversight Committee].
I believe we’ll attain this goal in the long run. But there is much work to be done before we get there.