The over-the-counter (OTC) derivative markets have undergone significant regulatory reforms since the global financial crisis. Among those changes are regulatory requirements designed to bring greater alignment to the quality and accuracy of trade reporting data to effectively manage systemic risk. On the back of the new deluge of regulatory rules rewrites – essentially trade reporting rules 2.0 – how should firms ensure that their existing reporting infrastructure is future-ready to meet the rules' requirements?
Related: Why incoming regulatory changes present significant post-trade challenges
This was the centerpiece of the panel discussion at DTCC’s annual APAC Executive Council Meeting, chaired by Marie Chinnici-Everitt, DTCC Managing Director and Chief Marketing Officer. Participating in the discussion were panelists Anita Leung, Managing Director, Head of Operations – AEJ, Nomura, together with Chris Childs, DTCC Managing Director, Head of Repository and Derivatives, and Tom Fitzgerald, DTCC Managing Director, Repository and Derivatives.
Managing Complexities and Challenges
Looking at the key challenges of these rule changes, Childs indicated the need to upgrade old and existing trades to new datasets. As some of the trades were reported 10 years ago, the new data may not be readily available today.
He added, “The Unique Product Identifier that will be introduced for all reported trades will need to be paired, shared and recorded between the two counterparties. As this process must be completed within a specified time to enable T+1 reporting, the tight timeline will be challenging, particularly for counterparties located in different time zones. That said, this issue does not apply to trades executed on approved trade execution facilities or trades that are electronically confirmed. Also, messages in ISO format for inbound submission is a new requirement that will require messages coded to ISO standards.”
Navigating Multi-Jurisdictional Obligations
With her global role and experience in managing post-trade operations, Leung shared that standardization is critical to ensure successful compliance. She explained that duplicated work can be removed by establishing a centralized setup to manage reconciliation and pre-validation needs – ensuring that any rewrite program and framework built for one jurisdiction can be reused for other jurisdictions.
Leung continued, “Because the implementation dates for trade reporting rule changes are happening at about the same time – Japan and Europe in April 2024 and Australia and Singapore in October 2024 – in-scope firms with multi-jurisdictional obligations will most likely face a resource crunch. There is also the challenge of bringing a cross-functional team onboard to understand that trade reporting requires a diverse group of support across the organization. Firms should also understand the end-to-end workflow as not all issues are related to trade reporting, it could be related to technology, processing or capture of front-office data that cannot be solved alone by the operations team. For example, front-office support may be required to ensure on time booking of trades or use of accurate and complete data for timely reporting.”
Understanding Early Lessons Learned
Leung advised, “Firms should not underestimate the amount of time required to gather a task force to consider the regulatory, system, and UAT requirements to ensure compliance with the revised rules. As regulatory specifications and functionalities continue to evolve, assumptions and interpretations made may not be accurate. Early preparation will ensure that there is sufficient time to fix errors.”
Laying the Groundwork for the Industry
“We plan to host all our trade reporting applications in the cloud as we have seen benefits from the resilience standpoint and real return on investments in cloud computing compared to on-prem solutions,” commented Fitzgerald. “Our multi-regional, multi-tiered Software-as-a-Service model has enabled us to leverage computer capacity on-demand to provide greater service capabilities and help manage any market volatility as we prepare for changes in trade reporting rules in the next 12 to 24 months.”
Ensuring Successful Implementation
Childs highlighted the importance of enhanced reporting processes and systems supported by effective governance, collaborative project management and skilled resources.
“Firms should focus on the quality of data to be reported and the control framework, governance, and data lineage of trade reporting to prevent potential issues during production. And allow sufficient time for testing to detect issues before porting to production,” he said. Additionally, Childs encouraged reporting firms to join DTCC’s working groups to obtain useful information, avoid pitfalls and share best practices.
Looking into the Horizon
Post rewrites, Leung and her team will identify gaps from their experience and determine resources needed for quality assurance of reported data to prepare for the next round of regulatory changes.
Because data is an important business asset, Fitzgerald anticipated that future developments would unearth more value from the reported data.
“Data exchange and data reconciliation can be simplified not just for trade reporting but across the post-trade lifecycle of the derivatives industry. By enabling data sharing through cloud platforms, firms will be able to access their data quicker,” said Fitzgerald. “Additionally, firms can leverage new analytics solutions that can sift through tons of data that reside in the cloud and run models on the datasets to provide the assurance that what has been reported complies with the regulatory requirements as fines for non-compliance could be onerous.”
Fitzgerald would like to see the industry develop a central datastore incorporating trade reported data and data from other post-trade sources to drive efficiencies across the post-trade lifecycle. He envisaged that machine learning and analytics tools can be employed to derive important intelligence on the petabytes of merged datasets.