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April 23, 2015

Clearing the Hurdles to Meaningful Trade Reporting

When the new derivatives rules established trade reporting as one of the key goals, regulators assumed that this would unlock the door to market transparency and the ability to monitor systemic risk.  While much progress has been made, as trades flow into the trade repositories, it is widely acknowledged that attention must now focus on data integrity.

Clearing the Hurdles to Meaningful Trade Reporting

By Susan Hinko and David White

 

When the new derivatives rules established trade reporting as one of the key goals, regulators assumed that this would unlock the door to market transparency and the ability to monitor systemic risk.  While much progress has been made, as trades flow into the trade repositories, it is widely acknowledged that attention must now focus on data integrity. Both regulators and the industry are underscoring the need to validate and align the reported data.

The regulatory requirements for trade reporting are not consistent across jurisdictions and therefore the challenge of ensuring data accuracy differs from one jurisdiction to the next.  In the US, a “single sided” regime is in place where only one institution has to report one side of each trade.  With an established hierarchy determining who reports a trade, it is typically the dealer who reports trades to a repository of its choice.

In Europe, things are more complex with a double-sided reporting framework that requires both the buy and the sell side of a trade be reported.  Each side can report to a repository of its choice or delegate its reporting responsibility to the counterparty or a third-party agent.

Both models result in trades reported to multiple trade repositories but the double-sided European requirement adds the challenge of trying to match up the two sides of the same trade which are commonly reported independently.  The number of fields to be reported amplifies the opportunity for error and discrepancy in the repository data.

In its February 16th press release, ESMA states that its “supervisory focus has now shifted to the quality of the reporting data.”  This sentiment was echoed in the US when CFTC chairman Timothy Massad commented in his February 12, 2015 testimony to the US House Committee on Agriculture that, “while we have accomplished a lot, much work remains……market participants must live up to their reporting obligations.  Ultimately they bear the responsibility to make sure the data is accurate”. 

Recognizing that regulators look to the data for a view of their business, firms are focusing on reconciling and verifying the accuracy of the reported data, and exploring various tools to facilitate the process.  Some jurisdictions, like Europe, actually require that if reporting has been delegated, a firm is responsible for reviewing the accuracy of data reported on its behalf.

 

The Challenges of Repository Reporting

Given all the requirements and responsibilities associated with data reporting, the challenges are gaining visibility of what’s been reported, normalizing the reported data, and making sure that both sides of the trade data are consistent with each other and with internal books and records.

In the single-sided reporting model like the US, participants’ main concern is to validate internal books and records against the data reported by themselves (flowing perhaps from a different internal system) or their counterparties.

In double-sided reporting regimes like Europe, the challenge can vary depending on how the two sides of the trade have been reported to the repository.  If one side of the trade has delegated reporting to its counterparty or a third-party agent, then the goal will be to ensure that official internal records are consistent with the record sent to the repository by the counterparty or agent.

But for participants reporting directly without delegating reporting responsibility, the concern is to validate the report they send to the repository against the counterparty’s information; and additionally,  against their own in-house books and records.  To aid them in these different types of validation, market participants have looked to automated tools that can facilitate whatever validation or reconciliation process is required.

 

Repository Reconciliation Transforms Data Reporting

TriOptima’s triResolve service, originally designed for reconciliation of OTC derivative portfolios for margining purposes, now offers a tool to reconcile and verify repository data against books and records.  triResolve collates the different output data from trade repositories and normalizes it to enable a consolidated, complete view. It leverages the triResolve algorithms to match data without requiring a common ID or USI/UTI on both sides but retains all the information available so identifiers assigned by each reporting entity are compared to internal firm IDs. 

As illustrated below, the repository reconciliation process compares all the data submitted by each participant in the reporting process against the information already residing and reconciled in the triResolve portfolio reconciliation service.  Differences and omissions are identified, and can be resolved directly on the triResolve platform. And reports can be downloaded so UTIs can be absorbed and recorded in internal systems.

 

triResolve Repository Reconciliation

Most importantly triResolve enables analysis of data by asset class, counterparty, or product class so differences can be resolved in a logical way.  In addition, the root cause of discrepancies can be identified for both sides of the reported data. Proactive identification of the root cause of discrepancies over time enables differentiation between genuine reporting errors and differences in data standards so that data can be aligned and discrepancies prevented.

By gaining visibility of the reported data and implementing a proactive and robust repository reconciliation and validation process, market participants can achieve meaningful and comparable data reporting that will go a long way to meeting the original goal of the regulatory requirements and to offering regulators a more accurate picture of institutional exposures.


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