The Trade Repository facilities that have been gathering data in accordance to the European Securities and Markets Authority’s (ESMA) European Market Infrastructure Regulation (EMIR) are at the centre of the new rules surrounding Over-The-Counter (OTC) derivatives reporting that debatably became mandatory for all entities involved in fx, spread betting, CFD providing and even exotic products such as binary options.
Up until now the role of the TRs has been largely neglected by the ESMA when addressed in press releases. However in a statement this week the regulator has issued a clarification document aiming to bring additional transparency to this relatively murky part of the reporting mechanism.
Back in November 2013 the ESMA registered 6 TRs that started operation on the 12th of February 2014. Their function is to collect vast amounts of trading data – essentially all standing open derivatives positions and exposures are reported on a daily and quarterly basis to mitigate risks to the financial sector across Europe. As a direct supervisor of the TRs, the ESMA is aiming to make sure that TRs comply with all requirements set forth by the EMIR. The regulator is allowed to access the data and the details of the derivatives contracts to attain that goal.
Throughout this year, the ESMA will implement and publicly reveal all the procedures that need to be performed to successfully supervise the TRs. The regulator will monitor and assess for potential risks arising from the information provided from the TRs while it takes into account complaints and additional data provided by authorities, as well as review requests for information.
Accumulation of market sensitive data
The amount of data collected and its importance and sensitivity could well be a very powerful source of market information. There are jokes circulating across the industry that with all the numbers at hand, the ESMA could start its own hedge fund venture or at least a market price prediction department. Regulating is not easy, and adequately protecting this sensitive data is crucial to the purpose of the EMIR.
We have concluded the first, transitory period between the registration of the TRs and the submitting of the first reports to the data collecting entities. There is still no official statement from the ESMA as to how did the EMIR reporting launch evolve in the first couple of weeks since its launch in mid-February. However sources close to Forex Magnates have confirmed that during the first ten days of EMIR reporting one company who has been sending data to the TRs sent about 1 million and another totaled to 2 million trades.
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This is nothing substantiated as the number of trades does not provide any clue as to what is the volume involved, however it states that there is a degree of successful implementation on track and ongoing. Meanwhile with the critical importance of data collected, let’s hope that we are not setting the stage for yet another major “investigation” scandal – LIBOR and FX fixings are quite enough of a blow to the financial markets industry.
On-boarding clients and authorities
One of the main challenges that arise from the EMIR implementation is the on-boarding of the clients. Since the framework affects thousands of counter-parties spread out across the Euro Zone and there is a 90-day period between the TR registration and the start of reporting a lot of supervisory efforts will be required throughout the first half of the year to get everyone on board.
Another challenge is the on-boarding of regulators – a ton of regulators will be requesting access to the TR data (which might seem worrisome not only to conspiracy theorists). How will the rule enforcers monitor all the TRs’ data collectively is a key process. According to the ESMA, data should be reconciled across TRs if counter-parties report to a different TR. The technological challenges that are arising in tandem with this process are planned to be thoroughly addressed by the ESMA, however no details are provided as to how for now.
Since the process has already started, we are entering the second phase of EMIR implementation – the next couple of months will be key to ensuring a stable flow of data which allows for proper analysis to be conducted based on it. The ESMA will have a huge load on its hands in ensuring that everything goes on as smoothly as promised.
Addressing the risks associated with the sensitivity of data
The ESMA appears to be acknowledging a number of risks related to the TRs and the implementation of EMIR reporting. The regulator outlines legal, organisational, financial, operational and data access requirements risks. The ESMA will be (is) examining every TR and will define a risk profile for each of the six entities, which is based on certain activities (for example IT functions) within each TR itself. The risk profiles will determine where are the biggest vulnerabilities and supervisory mechanisms will be enacted to ensure implementation of better practices at the TR.
Well all of this sounds just perfect, however the implementation part of the story is where the questions are raised. The more power a single regulator gets, the more vulnerable it becomes, especially in the context of a constantly evolving and increasingly complex technological environment that is a key part of the process. Could the ESMA be a little naive as to how well this story is going to unfold? All that we can do for now is wait and see…