Regulators across Europe are still struggling to make sense of the huge influx of derivatives trade data that is being reported under the European Market Infrastructure Regulation (EMIR), nearly 18 months after reporting became mandatory in Europe.
| What’s important here is to figure out what differences really matter to the goal of financial stability|
“From a regulator’s perspective, it takes a huge amount of resources to digest the data we receive and to map it with the regulatory requirements,” said Stefan Pankoke, director of the division for OTC derivatives markets supervision at German regulator BaFin. “Tremendous efforts in this area lie ahead of us, and my prediction is that we will have to be satisfied with an 80:20 solution in one or more areas.”
Speaking at the Futures Industry Association’s International Derivatives Expo in London on Tuesday, Pankoke was one of several senior regulators and market participants to raise concerns about the EMIR reporting regime, which has been in place since February 2014.
One of the biggest challenges encountered so far is that EMIR requires both counterparties to a trade to report it to a repository, unlike in the US where the Dodd-Frank Act mandates only one side to report. Typically, the dealer would handle the reporting on behalf of its buy-side client in the US, simplifying the operational challenge.
Double-sided reporting necessitates additional work for market participants, while also increasing the risk of duplication and omission of trade data, making it more difficult for regulators to piece together information from repositories. While much of the FX market is expected to be exempt from EMIR’s central counterparty (CCP) clearing requirement, in line with US rules, all non-spot products must be reported.
“There is a loud clamour for single-sided reporting across the industry, and we’re asking for exchange-trade derivatives reporting to be removed from EMIR because all the data you need is over at the trading venues or at the CCPs,” said Simon Puleston Jones, chief executive of FIA Europe.
|Verena Ross, ESMA|
“However, 15 months after the introduction of any major data reporting system, it is rare to see data quality at an acceptable level,” said Ross. "The practical experience acquired so far, together with valuable feedback provided by the reporting community and trade repositories during the implementation phase, allows us to identify a number of shortcomings.”
Meanwhile, cross-border harmonization of derivatives regulation appeared still to be some way off on Tuesday, as Ross applauded the work that ESMA had done with other authorities, but remained committed to an unpopular stance the regulator has adopted on margin collected by CCPs from their clearing members.
While US regulators require CCPs to collect gross margin based on the losses that could be incurred during a one-day period, European rules would require margin to cover a two-day period of loss, but exposures can be netted. The disparity has been a sticking point in the efforts of the Commodity Futures Trading Commission (CFTC) and the European Commission to reach an equivalence agreement for clearing.
“We are open to recognizing that we can learn from each other’s experience, for instance on the benefits of gross collection of margins – as done in the US – for the protection of clients,” said Ross. "I would hope, however, that also the CFTC will want to reflect further on the benefit of two-days minimum period of risk on house accounts for the protection of the CCP and the non-defaulting clearing members.”
However, asked in a separate session to respond to that position, CFTC chairman Timothy Massad showed little inclination to expand the minimum period of risk to align with European rules.
“We don’t think that’s true,” he said. “I think what’s important here is to figure out what differences really matter to the goal of financial stability. We can’t just focus on one particular thing when you’re talking about risk mitigation – you have to look at the whole panoply of measures that we use.”
After a meeting between Massad and European Commissioner Jonathan Hill in Brussels on May 7, the two sides issued a joint statement expressing the aim of finalizing an approach to equivalence for CCPs by the summer.