EU trade repository matching disrupted by Emir overhaul

Some say problem affecting derivatives reporting has been resolved, but others find it persists

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Trade repositories (TRs) responsible for collecting and storing details of executed derivatives trades stopped exchanging data with each other for several months following an overhaul of European Union trade reporting rules, according to five sources. Although two sources say data seems to be flowing again, another two are still experiencing problems.

“The inter-TR reconciliation is still not working as you’d expect due to what we deem to be many issues at certain TRs,” says a reporting service provider, who spoke to Risk.net in mid-October. “Certain TRs seem to be further ahead than others, but obviously they all need to be playing for it to work.”

A spokesperson for the European Securities and Markets Authority (Esma) – which oversees compliance with EU trade reporting rules – says: “Enhancing the inter-TR reconciliation process is one of the priorities for the coming months.”

On April 29, sweeping changes came into effect governing the transaction details that counterparties of derivatives trades in the EU need to report to trade repositories. The amendments to the European Market Infrastructure Regulation, known as Emir Refit, added 89 new data fields while deleting 15 and altering some of the existing fields. Emir’s reporting obligation was first implemented in 2014 to shed more light on activity in the trillion-euro derivatives market.

Regis-TR remains fully committed to ensuring the reliability and accuracy of its reconciliation processes and is proactively supporting the industry’s adaptation to Emir Refit’s new regulatory landscape

Regis-TR spokesperson

Unlike many jurisdictions, the EU – and UK – reporting regimes require both counterparties to a derivatives trade to report its details. Dual-sided reporting is meant to act as a way to verify whether the details reported by each counterparty are correct. If both counterparties report the exact same information, regulators can trust they have an accurate view of the trade. If not, regulators know they might be looking through distorted lenses.

“The correct functioning of the inter-TR reconciliation process is pivotal for the achievement of high-quality data, which is in turn essential to ensure adequate monitoring of risks,” says the Esma spokesperson. “Bad quality data or malfunctioning of processes have negative effects on regulators’ ability to exercise their duties.”

Four trade repositories in the EU are registered to collect reports and provide the details to regulators. If counterparties report their trades to different repositories, the infrastructure providers must exchange details with one another to reconcile reports. Following the introduction of the new rules, this stream of data between TRs abruptly stopped.

Reconciliation rates are gradually returning to pre-Refit levels

Esma spokesperson

Two sources using the Depository Trust and Clearing Corporation say they spotted a problem where the TR needed to share data with Regis-TR, which is part of Switzerland’s SIX Group. One of the same sources, together with a third DTCC user, also identified problems with transfers between the DTCC and the London Stock Exchange Group.

“TRs are mandated to report to Esma issues they are facing in meeting their regulatory obligations, [and] as such Esma was aware of shortcomings in the inter-TR reconciliation process,” says Esma’s spokesperson. “There were several fixes that were implemented by TRs to address those issues. At this stage, we observe that reconciliation rates are gradually returning to pre-Refit levels.”

Two sources agree that data is now flowing again, one of whom says the situation returned to normal in September.

“Regis-TR confirms it has fully resolved the underlying issues relating to providing reconciliation information to other TRs post the Emir Refit reporting start date, and we are now delivering reconciliation data daily,” says a spokesperson representing the trade repository.

A further source, however, says the flow still seems irregular.

Broken links

Views differ on what caused the disruption in the first place. Both sources that told Risk.net of the break between DTCC and Regis-TR say they understood the issue to have been related to Regis-TR not sharing data.

The Regis-TR spokesperson says the challenges of Emir Refit had been compounded by the repository’s simultaneous launch of a “new, comprehensive” IT platform designed for Emir reporting. The overlapping change projects introduced “additional layers of complexity”.

“Regis-TR remains fully committed to ensuring the reliability and accuracy of its reconciliation processes and is proactively supporting the industry’s adaptation to Emir Refit’s new regulatory landscape,” says the spokesperson.

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A source close to the matter says the DTCC didn’t experience operational issues at the individual firm level, including with file transfers, which suggests the root of the problem wasn’t at the DTCC itself. Two further sources compliment the DTCC’s overall performance implementing the Refit, with one saying they had been “best in class”. One source says the volume of data exchanged between the DTCC and LSEG had been reaching record levels.

“I believe there was a technical issue over the sheer volume of data that wasn’t allowing it to be sent, or there was some sort of hurdle that meant as soon as you go above a certain number of records, it just all fell over,” says a reporting expert at an asset manager, regarding the link between DTCC and LSEG.

Although the Emir Refit increased the number of possible fields that need to be reported, firms don’t necessarily need to report more information than before. Some of the new data fields only apply to certain types of trade, while existing data fields were culled for some trades. For instance, a ‘receiver/payer’ field was added specifically for instruments where an existing ‘buyer/seller’ field was inappropriate, such as interest rate swaps. For those trades, the new field is a replacement rather than an addition to the data reported.

Instead, sources point to a change in the required file format as a possible culprit for increased data volumes that jammed the system. Both the UK and EU regulators switched over to a schema known as XML, which is significantly denser than the compact alternative, CSV.

Firms were also obliged to update to the Emir Refit format any reports of outstanding positions submitted before April, within six months of the rules going live. These updated reports would have been submitted to trade repositories alongside reporting of regular new transactions. The Esma spokesperson says because the two counterparties could update their old reports of the same trade at different times to one another, it was clear pairing and matching would be “suboptimal” during that period.

Learning from mistakes

Emir does not specify responsibility for counterparties to investigate and resolve unreconciled derivatives reports – only to pass the report to the TR. Sources say the break in the link between trade repositories has sapped the already limited willingness of counterparties to participate in such investigations.

The issues faced by TRs and by market participants, however, make it clear that there should always be sufficient lead time to prepare for a new reporting regime

Esma spokesperson

To avoid a repeat of the disruption seen in the past few months, the reporting expert at the asset manager says trade repositories should test the exchange of information before any future rule changes go live. There is a perception among multiple sources that some trade repositories were not fully prepared for the EU reporting changes.

“The only way that they [repositories] would be able to mitigate that would be to actually test it beforehand with the volumes, and from my understanding they didn’t do any,” says the reporting expert at the asset manager.

By contrast, the UK went live with similar changes on September 30, for which many sources say repositories – and the industry as a whole – seemed better prepared. However, in practice, at least some testing was carried out in the EU before the go-live, says Esma’s spokesperson.

“TRs provided Esma with test results related to all the critical data processes that had to be upgraded or redesigned for Emir Refit,” says the spokesperson. “The issues faced by TRs and by market participants, however, make it clear that there should always be sufficient lead time to prepare for a new reporting regime.”

While TRs may be an easy target for ire, in reality pre-production testing needs the co-operation of all market participants. There are suggestions that some were slow to participate in testing environments that the repositories made available before go-live.

“While its issues were partly tied to the scale of [Regis-TR’s] simultaneous changes, the industry might have benefitted from more extensive pre-production testing by all TR participants, as some industry sources have observed,” says a spokesperson at Regis-TR. “Robust testing prior to launch could potentially have minimised some of the data-sharing issues that emerged post-Refit.”

LSEG declined to comment for this article.

Editing by Philip Alexander