Analysis

Will Regulators Assess Viability of Trade Repositories After CME Departure?

CME Group is closing down its Trade Repositories in Australia and Europe.

Last week, Finance Magnates broke the news that CME Group would be closing down its Trade Repositories in Australia and Europe, and will be winding down its Abide Financial and NEX Regulatory Reporting businesses.

Although the company will keep its United States (CFTC) Swap Data Repository and its Canadian Trade Repository services, the rest of its regulatory operations will be closed by the 30th of November, 2020.

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Market impact

As highlighted by TRAction Fintech, the ramifications of CME closing its Australian and European Trade Repositories will impact upon many other market participants. 

Trade Repositories are entities that centrally collect and maintain the records of over-the-counter derivatives, as well as exchange-traded derivatives in a number of jurisdictions. 

Trade Repositories were created as a database to handle submissions and store data that is then shared with national competent authorities (NCAs). Therefore, NCAs were not required to build their own Repositories to capture this information.

Sophie Gerber of Sophie Grace and TRAction Fintech
Sophie Gerber, a Director at Sophie Grace and TRAction Fintech

Speaking to Finance Magnates, Sophie Gerber, the co-CEO of TRAction Fintech and principal of legal firm Sophie Grace said: “In particular, regulators will be looking to remaining Trade Repositories and ARMs to ensure that they continue to receive the ASIC, EMIR, MiFIR and SFTR data from the market on a daily basis.”

Abide Financial and NEX Regulatory Reporting were key players

According to the European Securities and Markets Authority (ESMA), as of July 2019, the European Trade Repository of CME had 146 clients and an approximate 12 per cent market share. Therefore, the Repository represented the fourth-largest volume market share out of six active Trade Repositories.

Although CME’s Trade Repository wasn’t a massive player, as highlighted by Alexandros Constantinou, Director of MAP S.Platis and MAP FinTech, CME Group’s Abide Financial and NEX Regulatory Reporting businesses have been key players in the market. 

Alexandros Constantinou, Director of MAP S.Platis and MAP FinTech
Alexandros Constantinou, Director of MAP S.Platis and MAP FinTech

When asked how CME’s closure could impact the market, Constantinou added: “It really depends on your perspective. For example, if a reporting entity has not been directly or indirectly reporting to CME, then we do not expect any material impact. However, this still remains to be seen.

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“On the other hand, reporting entities that have been reporting to CME, either directly or indirectly, will definitely be impacted. These reporting entities will need to work with a new Trade Repository (TR) or Third Party Provider. Practically, this means that they need to negotiate new agreements, switch their reporting, migrate data and open positions and ensure consistent reporting, among others.”

Are Trade Repositories still viable?

Following the announcement of the upcoming closures, regulators might start assessing the viability of Trade Repositories and Approved Reporting Mechanisms (ARMs) as market infrastructure over the long-term. 

… regulators will be looking at the viability of trade repositories and ARMs as market infrastructure over the long-term,” Gerber pointed out. “Europe will be left with a number of TRs and ARMs, whereas Australia will only be left with one TR.  This may mean a new entrant comes forward in Australia to ease what will again be a monopoly on the infrastructure supporting this regulatory requirement.”

In Australia, Section 904K of the Corporations Act requires former Trade Repositories to transfer all records of data over to another Trade Repository. As there are currently only two Repositories in Australia, CME and DTCC, Gerber explained that CME will likely transfer its Australian data to DTCC, which will remain as the only Repository licensed as an ADTR. 

Regulators likely to look into Trade Repositories fees

Ron Finberg of Cappitech
Ron Finberg, Ron Finberg, Product Specialist, Regulation at Cappitech

Ron Finberg, Product Specialist, Regulation at Cappitech told Finance Magnates: “I believe its a two way street and most of the internal debate are repositories and ARMs are evaluating whether they are viable businesses to operate. With the exception of the DTCC which is owned by a consortium of banks it also supports, nearly all TRs and ARMs are operated by exchanges or providers of electronic trading solutions. 

“Among those firms there was a belief that there was a value add and cross-sell they could provide trading members with TR and ARM services. However, European TRs have had to absorb costs of updating their infranstructure to handle Brexit and cross-TR reconciliation which has increased their operating expenses. 

“As for regulators, I believe their main evaluation on TRs will be in regards to fees. There needs to be viable pricing that makes sense for reporting firms and doesn’t put them out of business while maintaining margins for TRs to continue to operate.”

Trade Repositories are integral to derivatives market

Commenting on the role Trade Repositories play for the derivatives market, Constantinou outlined: “… given the integral part that TRs play in the derivatives market and the upcoming Securities Financing Transactions market through SFTR reporting, we do not expect any changes for the time being to the framework and structure of TRs in the EU. Of course, a lot remains to be seen on how well the market adapts to this new development, one that is certainly worth monitoring.”

Clients of CME: what to do now?

Following the closure of the majority of CME’s regulatory services, existing clients will need to transition to new reporting services on or before the 30th of November 2020. As pointed out by Constantinou, clients of CME have less than six months to transition to a new reporting provider.

A number of companies that offer regulatory reporting services, such as Cappitech, MAP FinTech and TRAction Fintech have all been providing potentially affected entities with resources on how they can make the switch before the November deadline.

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