The joint venture between the market infrastructures of Spain and Luxembourg aims to capitalise on the buy- and sellside networks of two major European exchange groups, both of which have large exchange-traded derivatives franchises, the commercial nous and sell-side reach of an ICSD, and the undoubted advantage under EMIR of being unequivocally European.
“We were the first home-grown, European trade repository,” says Nicolas Boatwright, managing director of REGIS-TR, the joint venture between the Spanish central securities depository (CSD) Iberclear (part of BME Group) and Luxembourg-based international central securities depository (ICSD) Clearstream (part of Deutsche Börse Group). That is not as immaterial a characteristic as it sounds, in an environment in which both European financial institutions and European regulators are increasingly vocal about ensuring their data does not cross the Atlantic. “We also engaged very early on with the embryonic European Securities and Markets Authority (ESMA) around trade reporting, and so contributed to the definition of the reporting requirements,” adds Boatwright. “We have remained at the heart of that discussion, to help shape the reporting requirements in line with what is technically and practically possible for a trade repository.”
Being European is not, of course, enough. REGIS-TR is also much older and more experienced than some of its competitors would like market participants to believe. Work on it began four and a half years ago in the Spanish market, where regulators anticipated the Group of 20 (G20) agenda, let alone the swap reporting requirements set by ESMA under the European Market Infrastructure Regulation (EMIR). Clearstream had worked closely with the various parts of the Spanish market infrastructure since the formation of Link Up Markets, an international alliance of CSDs, in April 2008.
Iberclear had built a swap reporting platform for the Spanish market, and they identified an opportunity to internationalise it by joining forces with Clearstream. Though reconfiguring the Spanish platform for the wider European market was a far from simple task, the technological reorientation at least went well.A test environment for potential users was in place as early as November 2012, and ESMA was obviously convinced by the robustness of the platform since REGIS-TR was among the first wave of repositories to be authorised by the regulator on 7 November 2013.
“We gave clients a test environment early on, gave them contracts upfront, and set pricing at an early stage too,” says Boatwright. “These things have obviously evolved over time, especially as other providers entered the European market.But it gave clients a degree of certainty, and gave us a high degree of confidence that the system would be ready to go live on 12 February 2014.” But then both Clearstream and Iberclear began with a singular advantage: membership of exchange groups that trade and clear derivatives. The inclusion of 45 exchange-traded derivatives is one of the principal differences between EMIR and the derivative reporting regime introduced by the Dodd-Frank Act in the United States.
“Contrary to popular belief we have a deep experience of derivatives,” says Boatwright. “Our ability to leverage the knowledge and experience of Eurex and MEFF was extremely helpful to us in building a European trade repository.” In particular, it helped REGIS-TR develop an exchange-traded reporting capability, in addition to its OTC derivative platform. The service now covers all exchange-traded and OTC derivative asset classes.
That said, the project was complicated by the belated clarification from ESMA that the inclusion of exchange-traded derivatives was not the only difference between Europe and the United States. The European regulator demanded data in the same way as the Commodity Futures Trading Commission (CFTC) in the United States (see “The EMIR and Dodd- Frank Reporting Templates: A Map,” page 122), but also set no thresholds below which derivatives users are exempt, implemented a slower reporting timetable than the Americans (T+1 as opposed to real-time), and insisted that both sides of a trade report it separately. “We had adapted the system to meet the requirements of the Dodd Frank Act, partly in anticipation of similar requirements being enacted in Europe,” explains Boatwright. “When EMIR finally appeared, we realised that, although the same objective was being pursued, the manner in which the Europeans intended to achieve it was fundamentally different. We had to re-tool the system completely, to deliver an EMIR-compliant trade repository.”
Two-sided reporting also punctured corporate and buy-side expectations that they could simply outsource EMIR reporting to their executing or clearing brokers, who proved reluctant to add that operational burden and financial liability to their own already onerous reporting requirements, especially since they were unlikely to be rewarded handsomely for taking it on. A knock-on effect was widespread postponement by fund managers of decisions on how to comply with their EMIR reporting obligations. “The sell-side firms that had to comply with Dodd Frank were in a good state of readiness prior to 12 February 2014, but were nevertheless going to struggle with the inclusion of exchange-traded derivatives,” says Boatwright.
“It was bound to cause some issues, but ESMA always understood that exchange-traded reporting would present challenges.” Like other trade repositories, REGIS-TR was most concerned in the run-up to 12 February 2014 by the limited amount of work done by corporate users of swaps. “We anticipated that a `fat tail’ of corporates would start to report their swaps only weeks or even months after 12 February 2014,” says Boatwright. “After all, in the United States swap reporting was phased in. Here, we have arrived by default at something similar - a soft progressive start.” The good news was that, as the 12 February 2014 deadline grew closer, an increasing number of sell-side firms decided they were comfortable with the idea of supplying reporting services to the buy-side, albeit under the aegis of a third party reporting contract drawn up by the International Swaps and Derivatives Association (ISDA) that limits their liability.
A number of larger fund management houses have nevertheless elected to report directly to REGIS-TR, not least because they use so many executing and clearing brokers that they are concerned they might lose control of a regulatory responsibility for which they are ultimately liable, and also prefer to retain control of the disclosure of potentially sensitive information. Smaller managers were never likely to be ready on time, and did not always take note of the fact that regulatory signals of an indulgent approach to full compliance was contingent on putting in place demonstrably concrete plans to comply in progress. Boatwright refuses to be drawn on regulatory attitudes but notes that, since every fund managed by a fund manager is a separate legal entity and therefore obliged to report separately, managers are looking for delegated services that can handle that degree of complexity.
To help them, REGIS-TR is offering access to the repository by third party reporting agents without the need for every fund to be registered, provided the agents have agreements in place with the underlying managers to report on behalf of all their funds.“In effect, it means you can run an omnibus account from which you can report on behalf of all the underlying funds,” explains Boatwright. “You do not have to open a separate account for each and every fund. Legally, you have the same protection as you would in any other system. You just do not have the operational burden.” The “omnibus” approach saves money too. Unsurprisingly, given that ESMA is insisting the services be provided on a cost-plus basis, the REGIS-TR pricing model is consistent with those of other repositories.
It could nevertheless prove expensive if every fund had to open a separate account. The fee schedule is made up of an annual membership fee, a per transaction reporting fee that encompasses any modifications to the initial report, plus a maintenance fee for each open position. Fees are also capped at US$300,000 a year for all but the largest institutions - defined as those executing more than 250 million trades per annum, or with more than one million open positions a month – whose costs are capped at US$500,000. To help clients and potential clients comply, REGIS-TR has offered as many input channels as possible, including a manual option. “It sounds odd but, for certain investment managers, it is something they want,” says Boatwright.
“Equally, a number of larger managers are quite happy, because of the volume of foreign exchange trades, to leverage the SWIFT MT 300 confirmation messages, suitably enriched for reporting purposes.” Clients can also submit data to REGIS-TR through a web interface, XML and the FileACT file uploading service provided by SWIFT. In addition, REGIS-TR is formally partnering with 17 different providers of software, connectivity and reconciliation services, including “middleware” provider Traiana. “We have, from the beginning, worked in close partnership with software providers, consultants and providers of middleware and trading systems, because we believed strongly that not every counterparty would be able to access the trade repository directly, and that therefore delegated reporting was going to be the way forward for a lot of people,” explains Boatwright. “We have as a result built a relatively simple reporting mechanism. Even when you are in a delegated reporting model, it provides total visibility into what has happened at the level of the trade repository through what we call a `non-reporting entity profile.’”
REGIS-TR has not only welcomed a large number of vendors looking to help clients channel information to repositories, but established a formal business alliance with one: the technology vendor Abide Financial, which has an established set of users for its Markets in Financial Instruments Directive (MiFID) regulatory reporting service (see “Abide Financial,” page 80). “We complement each other’s strengths,” says Boatwright. “Between us, we offer the market a reporting hub, in which they have added our EMIR reporting service to their existing Markets in Financial Instruments Directive (MiFID) reporting platform. We in turn complement our EMIR reporting service with a ready-made MiFID solution, which will morph over time into a Markets in Financial Instruments Regulation (MiFIR) reporting solution.” It is an astute strategy.
In Europe, the 85 fields to be completed by EMIR-compliant entities is only one of multiple regulatory reporting obligations counterparties now face. Alternative asset managers must complete the reports described in Annex IV of the Alternative Investment Fund
Managers Directive (AIFMD) from later this year. The Regulation on Energy Market Integrity and Transparency (REMIT) requires market participants to report wholesale energy market contracts to a new body called the Agency for the Cooperation of Energy Regulators (ACER) sometime in 2014-15. MiFIR reports are expected to come into effect in 2016. The Shadow Banking initiative is likely one day to add repos to the list of reportable activities. Even in Switzerland, the regulator wants to see derivatives reported under the Financial Market Infrastructure Act (FinfraG). Different nuances in reporting requirements are a certainty, even within the European Union, where the definition of a from a Directive (MiFID) that is open to interpretation by local regulators rather than the Regulation (EMIR), which is not.
That torrent of reporting obligations is one reason why the REGIS-TR management feel they have enough work to do in Europe alone, at least for the time being. “Some trade repositories have global ambitions,” says Boatwright. “We are not ruling this out but, for the time being, Europe is our focus. We do Europe writ large, by which I mean the European Economic Area countries captured by EMIR, plus Switzerland.” As he points out, the European marketplace is large and complicated enough to absorb REGIS-TR and its clients for several years, especially since it is bound to evolve quite rapidly over the next couple of years. “The client base that we cater to also do, essentially, European business with European banks,” adds Boatwright. “Most of them do not have a requirement in Asia or North America yet. Some of the largest institutions that are accessing REGIS-TR find it is still economical to use different trade repositories in each region.”
He does not rule out expansion abroad in the longer term, especially given the international ambitions of Eurex, and the links Clearstream has with CSDs in Africa and Latin America via Link Up Markets. In fact, REGIS-TR is already providing its trade reporting systems to STRATE, the South African CSD that has applied for a licence to establish a trade repository in Johannesburg. Of course, a European focus does not absolve REGIS-TR of the need to form links with other repositories, either in Europe or further afield. The need to reconcile one-sided trade reports with the other half of the trade necessitates links between repositories. “All six trade repositories in Europe worked on the reconciliation model that was up and running on 12 February,” explains Boatwright. Reconciliation depended on the combination of a Legal Entity Identifier (LEI) to identify the counterparty (see “LEIs: what they are, who needs one, and where to get one,” page 18) and a Unique Trade Identifier (UTI) to identify the trade (see “UTIs: what they are, who needs one, and where to get one,” page 22) and a Unique Product Identifier (UPI) to identify the type of instrument (see “UPIs: what they are, who needs one, and where to get one,” page 26). Unfortunately – and for a variety of reasons – the full LEI process was not completed in time for affected entities to feel under pressure to obtain an LEI, or to be confident of obtaining one ahead of the 12 February 2014 deadline. Slow take-up of LEIs added to the challenges all trade repositories and their clients faced in getting ready for the deadline, and in coping with its aftermath, especially since the gap between authorisation as a repository in November 2013 and opening for business on 12 February 2014 was only 90 days. In addition, the guidance from ESMA on UTIs only became available on 11 February, and it left considerable scope for discretion by market participants.
Boatwright does not blame the regulators or ISDA – which drew up extremely detailed rules for the generation of UTIs and UPIs, based in part on American experience - for the reconciliation difficulties which affected all repositories after 12 February 2014, but says it is now critical to secure the right approach to the generation of UTIs. In his view, that is one which offers rules which are as simple as possible for all market participants to understand and follow. To that end, REGIS-TR has been offering input to ISDA to help shape the UTI system. “There is still some way to go to shape the UPI system so that it most effectively works for the European market, and we are working on inputting advice on this to ISDA,” says Boatwright.
Once reporting finally settles down, interesting questions will arise about what exactly the regulators plan to do with all the data they have received. As part of the application process to be approved as a trade repository by ESMA, REGIS-TR – in common with other repositories - had to explain exactly what data it could make available to regulators. REGIS-TR adopted the Financial Stability Board (FSB) guidelines as its template, but was still discussing the deliverables with ESMA as the go-live date was passed. “They want to identify exposures that are being created by certain entities across given instruments,” says Boatwright. “They can drill down into infinite detail if they like but, initially, they will want an overview of where the exposures are.” He expects aggregated data, such as trading volumes per asset class, to be made available to the public.
“This all plays into the over-arching transparency agenda which has driven EMIR in the first place,” adds Boatwright. “The trade repositories will offer more transparency into derivatives transactions.” Boatwright also points out that in the United States the CFTC found time was needed to enable the reporting system to bed down and mature before it could offer the consistency and clarity the regulator was seeking. The practical result was that both market participants and regulators effectively agreed that trade reporting was a work-in-progress, even as it waslaunched. Their European counterparts are now having a similar experience. “I think we are all going to have to accept that, for a period of around three to six months, there will be a good degree of working together to fine tune the reporting process,” says Boatwright. “But with a stronger dialogue between the trade repositories, the market at large and ESMA, we will be able to work together to deliver the clarity and transparency which we are all striving for.”