Challenges with EMIR Reporting Solutions
by Michiel Wijn, Senior Manager, Corporate Treasury Solutions, PwC (The Netherlands) and Erwin Bastianen, Senior Consultant, Corporate Treasury Solutions, PwC (The Netherlands)
As of last month, companies within the EU are required to report derivative positions under the European Market Infrastructure Regulation (EMIR). Over the last couple of months, companies have been preparing to comply with the EMIR reporting requirements. This article looks at the journey corporates have taken to select and implement their reporting solutions in time for the deadline. We also look at how we expect their reporting to evolve in the near future.
The European Securities and Markets Authority (ESMA) approved the first group of Trade Repositories (TRs) in November last year. This triggered a compliance date of 12 February 2014 for EMIR derivative reporting, leaving companies only 90 days to understand the TR landscape and implement an EMIR reporting solution. Quite a few companies postponed their selection of a trade repository, mainly to:
- See which TRs would be most commonly used by the industry;
- See how treasury management system (TMS) vendors would position their EMIR solution; and
- Assess how dealing platforms capture and transfer the right EMIR data fields into the TMS.
As a result of companies delaying their TR selection, many had to be onboarded by the TRs just before the compliance date. This led to a significant challenge for TRs, as they had to onboard high volumes of customers in a relatively short timeframe. In a few cases, this resulted in some TRs not having the capacity to onboard late subscribers in time.
Besides the selection of a TR, companies faced difficulties collecting certain EMIR data fields. Some of these data fields were not captured by companies before EMIR was introduced. To collect and store this data, the technology (e.g., TMS) and underlying processes needed to be changed. Many companies currently have manual processes in place to capture this data and anticipate creating more robust processes around reporting in the future. Furthermore there has been a lot of uncertainty around new data fields, such as the Legal Entity Identifier (LEI) and the Unique Trade Identifier (UTI). ESMA communicated standard procedures around these data fields just one day before the reporting deadline. It is now up to the market to adopt these standards.
We have found that the majority of TMSs are not yet ready to fully support EMIR reporting – in terms of both data capturing and automated interfacing with the Trade Repositories. As a result, a relatively large number of corporate derivative users were forced to implement an interim solution: either a manual solution or outsourcing the reporting obligation to their counterparties, often banks.
We have seen that sizeable corporates, with over ten external derivative counterparties, have decided to take the outsourcing route. For companies with internal derivatives (as part of a back-to-back hedging programme), outsourcing is not considered a viable option, as the counterparty is not aware of the internal derivatives. Therefore it simply cannot report these internal trades on behalf of the company. A side-effect of outsourcing is that the dual reporting process, as intended by EMIR, will in practice be very comparable to the single-sided reporting imposed by the US derivative regulation (Dodd-Frank Act).
Multiple TMS vendors have not yet been able to benefit from an interesting market opportunity, even though we have seen vendors teaming up with one specific TR or initiating an EMIR development group among their largest customers. This is strongly driven by the short timeline between the TR approval date and the reporting start date; but also TMS vendors seem to have realised too late what the impact of EMIR would be on their customer base and how these new needs could be addressed by their system.
We expect that EMIR reporting will form an integral part of the TMS vendors’ offerings in the near future. A number of vendors indicated that they expect solutions to be developed and available to clients in Q2 and Q3 of this year.
Typically corporates tend to focus on simply achieving compliance with new regulations in the short term, and then process optimisation follows. By the time EMIR reporting is well embedded in the day-to-day procedures and technology, the next new regulation will be around the corner. This might be MIFID 2, which is widely expected to have an even more significant impact on the derivatives market than EMIR has so far had. More challenging deadlines to come…