ESMA defiant over OTC trade reporting guidance

ESMA has denied claims that it is being unhelpful

The European Securities and Markets Authority has disputed claims that it should be doing more to help financial institutions connect with trade repositories, following complaints that the regulator has not allowed enough time, has issued key specifications at the last minute, and is now scaling back its involvement with the job unfinished.

On 12 February, the trade reporting deadline for OTC derivatives trades came into effect under EMIR. However, major questions remained unanswered right up until the deadline, including the definition of product identifiers, the standards for LEIs and how unique trade identifiers should work. Then at around 1700 on 11 February an updated Q&A was released by ESMA – an incident that has created much bad blood between the industry and the regulator.

“The industry didn’t have a lot of time to implement the standards given the lack of complete guidance until after the systems were already in production on 11 February,” said PJ Di Giammarino, chief executive at London-based regulatory think-tank JWG. “It takes a lot of time to go wire up your systems and connectivity, you can’t just flick a switch and make it happen overnight. There are six trade repositories and the industry has spent billions in preparations. You have to ask, is this the right approach? Even the Financial Stability Board has acknowledged that.”

Adding fuel to the fire, at a meeting between ESMA and the six European trade repositories last week Fabrizio Planta, team leader for post-trading at ESMA last week said that it has already provided Q&As on how to implement standards for trade repositories, and that  it is up to the industry to come up with a standard for unique trade identifiers – which may have come as a shock to some sections of the industry.

Trade repositories contacted by Banking Technology, including the DTCC and Regis TR, declined to comment on the topics discussed at the meeting.

ESMA says that Planta’s comments should be seen simply as a call to implement the existing guidance and points to the fact that it has issued new EMIR guidance, on collateral and valuation,this week.

“[The accusation] is a bit misleading,” said Reemt Seibel, an ESMA spokesman. “It is not a matter of continuing to ask for more guidance, which ESMA will continue to provide if need be, it is a matter of applying the existing guidance. This is important, as if implemented properly, it will significantly improve data quality.”

“ESMA have made it clear that they don’t see the need to give more guidance, which is surprising to a lot of people,” said Di Giammarino. “They forced the industry to spend billions of Euro and ignored objections about the cost and the concerns that producing 6 billion reports a year of variable quality may not provide much benefit. Europe has chosen a complex path which differs from the US in that there isn’t a mechanism like the no-action letters if something doesn’t work out. If we stay on this path, it is only going to get worse.”

According to JWG analysis, there are still serious problems with the trade repository regime. In particular, matching rates between trade repositories are below 1% – meaning that a consolidated view of the market is currently virtually impossible.

“There are 120 million reports done per week, and we don’t know what else is going on out there –what’s not reported,” said Di Giammarino. “People are going to be asking, are my matching rates low because everyone is doing this differently, or is there another reason? It becomes hard to make sense of the data when there are unplugged gaps.”

Previously, JWG has reported that the lack of clarity over LEIs may make much of the data collected by the EMIR rules in Europe and the equivalent Dodd-Frank legislation in the US essentially meaningless. The difficulty is caused because there are currently insufficient LEIs to cover the full range of instruments being traded. In essence, this means that although trade data is collected, it may be of limited value to market participants and regulators. Given the cost to the industry of implementing the regulatory reforms, some have argued that the entire reform agenda agreed by the G20 at Pittsburgh in 2009 may be perceived as an expensive failure that does little to increase transparency or ensure safer markets.

“ESMA could do more if they weren’t so short-staffed and busy with 860 questions on MiFID II amongst other things,” said Di Giammarino. “At some point either the industry will have to pick up the slack or the courts will need to weigh in. Things could get messy and we may see fines, unless the industry and trade repositories get together to collaborate and fix this. It is very early days yet, it could go either way.”