Following the landmark G20 Pittsburg Summit in 2009, one of the risk-mitigating reforms that was enforced was the reporting of over-the-counter (OTC) derivatives trade information to trade repositories in key regulatory jurisdictions across the globe. As the reform is intended to detect market manipulation and mitigate any emerging or build-up of systemic risk, the gathering of accurate and consistent reported trade data globally is essential to prevent another financial crisis from repeating itself.
Related: The Journey to Global Data Harmonization in Trade Reporting
Given the lack of consistency and absence of global standard in data collection and reporting format, the reform program so far has only brought about improved market transparency in the participating jurisdictions. To capture activities appropriately and holistically in the OTC derivatives market to help identify potential systemic risk, the Financial Stability Board (FSB) has been pushing for a synergistic approach in aggregating OTC derivatives trade information globally. Standard data sets including various identifiers and harmonized reporting format are prerequisites to achieve the intended reform mission at the global level.
Against this backdrop, regulators in the U.S., Europe, Australia, and Singapore are now embarking on a journey of trade reporting rules rewrites and the Financial Services Agency of Japan is deliberating on revising its trade reporting framework – to align and harmonize its rules with the rest of the world.
I recently moderated a virtual panel as part of DTCC’s Trade Reporting Series to discuss two upcoming regulatory reforms that are critical to market participants in the OTC derivatives market in Japan – global regulatory harmonization of trade reporting rules and decommissioning of the direct trade reporting option.
Joining me on the panel were Seiichi Tanaka, General Manager, Wholesale Operations and Procedures Planning Office, Operations and Planning Division, Mitsubishi UFJ Morgan Stanley Securities, Ltd.; Go Oyama, Vice President, Operational Planning Investor Services Planning Division, The Mater Trust Bank of Japan, Ltd.; and Ayako Chikada, Executive Director, Relationship Management, DTCC Data Repository (Japan) K.K. Below is a recap of our discussion:
Streamlining a Global Rollout
Firms that have reporting obligations across multiple jurisdictions will need to consider the staggered roll out of rules over the next few years. This essentially means that modification to reporting processes and systems may need to be implemented in phases to fit each jurisdictional requirement.
Based on guidance from CPMI-IOSCO1, a working group on harmonization, regulators are progressively adding critical data elements (CDE) along with unique product identifiers (UPIs), unique transaction identifiers (UTIs) and legal entity identifiers (LEIs) into the regulatory rewrites. Adopting these standards should be a global collaboration effort.
With this in mind, panelists expect new data sets, including: CDE, identifiers, and ISO20022 compliant XML message format in the revised reporting framework in Japan. Firms should be prepared to launch significant system development projects to achieve reporting efficiency and regulatory compliance since there will be substantial changes in reporting requirements compared with the current required data fields. To simplify deployment, we agreed that one single implementation of these new data sets is preferred versus piecemeal adoption.
Market participants must put rules rewrites on their radar and aim for a smooth and seamless implementation of rules changes.
Establishing Market Practice for Data Sharing
Since the inception of the derivatives trade reporting regulatory framework in Japan, firms have not been mandated to share any data sets between the reporting parties due to the hybrid reporting structure between single and dual-side reporting and the absence of delegated reporting. To ensure the availability of trade information for timely reporting, the panelists recommended the industry agree on a standard methodology for sharing new data sets, including UTI, UPI, valuations and package trades.
Instituting Reporting to a Trade Repository
Firms that previously reported their derivatives transactions directly to the Japan Financial Services Agency (JFSA) will have to perform a gap analysis to identify differences in requirements between direct reporting and reporting to a trade repository – particularly on data fields and reporting format. The reporting frequency will also differ, from weekly to daily reporting. Weekly reporting of derivatives trades is a unique requirement in Japan – to be revised soon to align with global requirements.
Affected firms will need to set aside ample time for onboarding to the designated trade repository in Japan, DTCC Data Repository Japan K.K.
Keeping Abreast with Rules Updates
The final takeaway was for market participants to be aware of the changing reporting rules requirements and to analyze the impact, manage resources, share best practices and capture lessons learned from other jurisdictions.
The trade reporting framework in Japan has not been amended since its application in 2013, meaning all impacted market participants are facing a major turning point. Market participants must put rules rewrites on their radar and aim for a smooth and seamless implementation of rules changes.
1 CPMI IOSCO1: Committee on Payments and Market Infrastructures (CPMI) and the Board of the International Organization of Securities Commissions (IOSCO)