For as long as EMIR derivatives trade reporting rules have been in place, there has been the option for delegated reporting.
Since the deadline for implementation in February 2014, the rules around EMIR allow for companies to either directly report themselves to the trade repository, or for a third party to do it on the company’s behalf.
Under EMIR, companies are required to report all over-the-counter and exchange-traded derivatives to a trade repository. The repositories hold this information to make it available to financial regulators.
The additional layers of complexity added by the number of parties who need to be involved makes the process difficult and time-consuming for corporates, some of whom are not familiar with operating within such regulatory requirements.
“Reporting has been a big change for non-financial entities,” says Elena Gaetini, European head of business development and governmental affairs at Risk Focus. “Some corporates argue about the fact that required data for the reporting is subject to interpretation by all actors – buy side, sell side and corporates, and also by the trade repositories.
“This happens especially if the repository selected by a party and its counterparty are different. This problem could be reduced if the reporting party adopts a solid validating system that can detect errors and omissions, offering improved data quality with the trade repositories and to the benefit of the regulators.”
While banks and corporates need to comply, Matt Hoffman, director of global regulatory solutions at Chatham Financial, says corporates are finding it more difficult as they are still adjusting to a new way of working.
“Generally, corporate end-users (typically non-financial counterparties under EMIR) are not as heavily burdened as banks (financial counterparties under EMIR)," he says.
“But we’ve found that most corporate end-users feel the weight of these burdens more fully than many banks, who operate in more heavily regulated environments and tend to have more robust compliance systems and teams than many corporate end-users.”
Hoffman says he is still seeing corporates having difficulties with providing all of the information required, adding: “Over three years into EMIR compliance, we continue to encounter many end-users struggling with many aspects of EMIR’s reporting obligations.
"Some have taken the position that reducing certain end-user compliance obligations would not undermine the goals and benefits of the regulations.”
Therefore, the option to delegate has its appeal. Corporates have three options in selecting a delegate – their bank, a clearing house or a specialist service provider.
Under the bank model, the reporting to repositories can cover a bank’s activities and those of its customers. While some banks are offering this service for free to their clients, others are not. For corporates with multiple banks, they need to ensure that the activity involving each is being reported, either by the bank or by themselves.
Clearing houses will have already received the details of a trade, so are well positioned to do the reporting. They will provide this service along with the clearing, and as such offer it for free or at a reduced cost for companies already using their services.
Specialist service providers, meanwhile, offer reporting as part of their solution. They aggregate data and report it to the trade repositories. When using service providers, there is often a signing-up cost and a monthly fee, especially for those companies with a small number of transactions to report.
Costs and cautions
For a corporate that would otherwise have to bear the cost of updating its IT systems and whose employees would take a long time to complete the required tasks, such services can look like a more efficient option, in spite of any fees. However, Gaetini at Risk Focus cautions it is not applicable under all circumstances.
“Corporates believe that delegation is something very useful in their daily work, but as a paradox, it is only possible when the corporate is small and does not have any intercompany trade," she says. "In fact, intercompany trade needs to be reported to the regulator and the corporate is the only entity that has all the required information to do so.
“Also, some regulators are keener to see corporates reporting themselves because they believe that they are more in control of what is reported, and it is a great way to be educated in finance.”
And outsourcing raises an obvious concern over whether all information is being reported. After all, the responsibility to report lies with the corporate, regardless of whether it has outsourced this process or not.
Chatham Financial's Hoffman says: “EMIR is clear that European end-users are responsible for timely and accurate data reporting. We’ve seen some corporate end-users delegate reporting to their dealer counterparties, but many have found that the dealers have not reported properly or, in some cases, at all, and typical bank delegation agreements disclaim any responsibility for the bank’s failure to report on behalf of its customer.”
The result is that corporates are having to double-check what has been submitted, making the whole notion of delegation questionable.
“As a result, and because Chatham is the largest third-party submitter to the industry leading trade repository, many corporate end-users have engaged us to report transaction data for them or to audit their trade repository data to confirm whether and what their dealer counterparties have reported for them,” adds Hoffman.
Gaetini says it is leading some to question whether the amount of work needed is worth it.
“For smaller corporates [who rarely trade derivatives], it may be the case that the challenges of deciding how to comply may make them think that not hedging at all is an easier option,” she says.