The majority of buy-side investors were still preparing as of mid-January to comply with reporting requirements set out in European Market Infrastructure Regulation (EMIR) and they’re unlikely to be compliant by the February 12 deadline, the result of factors ranging from the sheer number of impacted entities to the limited cooperation from banks.
In a January 14 webinar survey, Chatham Financial found that 59 percent of the more than 200 participating corporates were still preparing and only 4 percent had completed steps toward compliance. The survey also found that 35 percent had yet to decide how to report the derivative trades, and only 18 percent planned to report the trades themselves. Meanwhile, 52 percent of respondents were unsure whether they were required to report under EMIR at all (see related article here).
Those dismal stats may actually represent the glass-half-full outlook, said Luke Zubrod, a director at Chatham, since webinar participants are likely to be further ahead than many other companies.
The reason for the buyside’s tardiness are numerous and varied, and one is simply logistics. Trade reporting rules in the U.S. that stem from the Dodd-Frank Act impact between 1000 and 2000 entities, while similar requirements in Japan affect only about 25 big swap dealers. In Europe, said Mr. Zubrod, more than one million entities must comply, and currently lines to onboard with any of the trade repositories are backed up.
“Even firms that began this process weeks ago are unlikely to be ready by Feb.12,” said Mr. Zubrod, adding, “Market infrastructure is overwhelmed by this traffic jam, so even folks who have been very diligent may find they won’t be ready.”
Not only must institutions report uncleared swaps but also exchange traded derivatives. And where dealers involved in swap trades in the U.S. are for the most part responsible for reporting trade details to date repositories, in Europe the buy-side holds that obligation as well. That means each party will reporting overlapping data, although each will have some unique reporting to do, too.
Buy-side institutions can delegate the reporting’s operational aspects to their banks or a third party such as Chatham, but they will retain legal responsibility for any reporting failures. In addition, said Mr. Zubrod, some major global banks including J.P. Morgan and Wells Fargo have said they will not accept that reporting responsibility from clients.
“If a company works with 10 banks, and two of those won’t report on the company’s behalf, it might decide to do all the reporting on its own under a single solution, rather than negotiating with each bank separately to take on the responsibility,” Mr. Zubrod said, noting that significant variation in derivatives documentation across counterparties and countries makes the process of delegating such responsibility cumbersome.
It appears that many market participants were either unaware of the EMIR obligations they face or believed the buy-side would delegate that responsibility to third parties. Calypso, a major provider of front- through back-office trading solutions, for example, announced Feb. 3—just nine days before the deadline—the release of an interface enabling EMIR reporting to the DTCC’s Global Trade Repository service, one of six trade repositories approved by the European Securities Markets Association.
The EMIR deadline was postponed early on, but since the trade repositories registered in November the clock has been ticking, and European regulators have no mechanism to delay compliance deadlines on their own, as US regulators do by applying “no action” relief. Instead, a legislative solution is required, and that’s unlikely to arrive in time. Mr. Zubrod said European regulators will likely look to see whether market participants have a plan in place and are taking best-effort steps to implement it, resulting in regulatory forbearance.