What’s next on the horizon for trade repositories?
29 September 2020
Another European TR is set to close its doors in October amid rising costs and business hurdles in the form of Brexit and regulatory complications. What will the future hold for this community of essential market infrastructures?
Image: Jirakit/stock.adobe.com
The revelation that CME Group will close its European and Australian trade repositories (TR), along with its Abide regulatory reporting suite, earlier this year laid bare the fragility of the essential market infrastructures that act as the curators of the market’s ever-increasing archive of trade data.
Moreover, the fact that the decision to wind-down the services came after CME failed to offload the businesses despite a months-long sales pitch highlights the challenges that hosting such services brings in an ultra-competitive marketplace where everyone must do more with less.
CME will retain its United States Swap Data Repository and its Canadian Trade Repository services but that will be of little comfort to its more than 1,000 clients that are now seeking a new home for their EU trade data.
“Historically CME has been the most competitive on pricing, but its departure strongly suggests that the lower price was unsustainable,” explains Ronen Kertis, founder and CEO of Cappitech, a British regtech firm.
CME is not alone deciding the TR life wasn’t to its liking. The market had equally proved too competitive for Bloomberg, which registered a TR with the European Securities and Markets Authority (ESMA) in 2017 but was forced to shutter the business two years later.
The news of CME’s imminent departure was a shock for much of the market and Kertis predicts that it will likely cause prices for reporting services to increase, which may have a knock-on effect on TRs.
If price becomes the key factor, service could be negatively impacted as firms reduce investment to meet lower cost demands, as well as Brexit complicating the process by requiring the formation of new entities on either side of the English Channel.
Filling the void
When the news of the TR closure broke in May, clients were left scrambling to find a new TR, despite CME Group assuring its clients and regulators that a smooth transition and an orderly wind-down of the impacted services would be put in place.
“When the announcement came there was a lot of concern, particularly from some of the bigger firms using CME’s regulatory reporting service that wanted to make sure they were supported post closure and could transfer in time with minimal disruption shut down,” says Michael Leach, managing director of global sales and business development at UnaVista.
Leach explains that TRs that made an investment over the years and are able to provide structure, resources and the right controls in place, such as UnaVista, will be able to provide that ongoing support and comfort for clients. “We have been in a good position where we can migrate customers over from CME and are able to facilitate a simple process for them using our automated CME format converter. We have seen a large number of customers coming to UnaVista to switch,” he notes.
KDPW, the Polish TR and central securities depository, responded to the occasion by developing a special offer for CME clients so they could easily switch to its TR. “We made sure to offer attractive prices,” says its CEO Maciej Trybuchowski.
Likewise, REGIS-TR is also using the opportunity to expand and build out its UK TR hub, which is also essential for its British clients in the context of Brexit.
But, even here, TRs face challenges. REGIS-TR head of business development, Nick Bruce says CME clients need to report to another TR by effectively the first week of November when the TRs close their doors. “There’s a huge number of CME clients that require their business to be taken care of,” he explains, and only a limited number of weekends when REGIS-TR can port them over.
The remaining TRs are welcoming CME’s former clients with open arms but industry experts fear that a bolstered roster of customers may not be enough to shield the community from the challenges ahead, including Brexit and an update to the European Market Infrastructure Regulation, known as EMIR Refit.
A tight Refit
As with all regulatory implementations, the benefit of hindsight brings lessons which can be learnt for future mandates. DTCC’s managing director of repository and derivatives services, Val Wotton, says that is especially true for the Securities Financing Transaction Regulation (SFTR) and EMIR. “Some challenges did occur regarding the timely distribution of the ISO schema and guidelines” for SFTR, he explains, and lessons can be learned from that and applied to the upcoming EMIR Refit.
For example, if ESMA adopts the ISO 20022 standard for the EMIR Refit programme, as it has for SFTR, “we would expect similar tools to be in high demand for that mandate, a trend that would grow as further Refits to trade reporting regulations come into effect in the US and Asia,” Wotton adds.
Firms will need to seek a solution that both reduces costs and manages their trade reporting data needs across jurisdictions.
The purpose of Refit is to address disproportionate compliance costs, transparency issues and insufficient access to clearing for certain counterparties. Its aim is to simplify the rules and reduce regulatory and administrative burdens where possible, especially for non-financial counterparts (NFCs), without compromising the regulatory goal of EMIR.
As of 18 June, responsibility for reporting OTC derivatives trades under EMIR was handed to FCs on behalf of their NFCs that are deemed NFC- under regulation’s new designations.
The NFC needs to confirm whether it intends to self-report to prevent the risk of double reporting, or a failure to report by either party. Flaws in the data transfer methods and general shortcomings in the average level of communication between NFCs and FCs means that this system is expected to lead to issues with duplicated reporting.
REGIS-TR’s Bruce says this issue creates a “perfect storm” and will bring an unprecedented amount of activity and movement to a market that isn’t built to support that number of clients or the volume of trades.
The big break
The next big question on the agenda is how will Brexit throw up barriers and complicate reporting processes once the transition period expires on 31 December?
From 2021, UK entities will no longer be legally obligated to report to ESMA, although they will still be subject to its rules for any EU-related business.
Bruce explains that “the reality is from a regulatory reporting perspective it’s actually very clear”: if you are a TR reporting for a UK entity, the TR has to be a UK registered entity.
“We were ready for Brexit last year, but the further delays has afforded us more time to prepare,” Bruce adds. REGIS-TR UK recently appointed John Kernan as CEO and to the board of directors as part of its preparations.
DTCC has also been in conversations with clients, Wotton explains: “We understand that their IT/testing resources are aligned in preparation for the end of the UK/EU transition period on 31 December, and as expected, the industry has factored in significant resources to ensure a smooth transition on that date.”
Despite the preparations, the split will not be free of downsides. KDPW’s Trybuchowski predicts that Brexit will inflate reporting costs for clients who operate on both sides of the border. To defang the challenge, most UK trade repositories are setting up operations in EU27, and vice versa.
“KDPW will be reporting clients’ trades in the UK in partnership with a UK TR. We have completed our negotiations and will soon be signing a contract with a selected partner. Clients of our TR who trade both in EU27 and UK will then be in a position to report trade on both markets within a single system,” Trybuchowski discloses.
TRs might be ready for Brexit and the issues with EMIR Refit might be clear, but in an industry where margins are razor thin and reporting costs are predicted to inflate, participants must be both innovative and willing to cooperate in order to reverse the trend of market shrinkage.
Moreover, the fact that the decision to wind-down the services came after CME failed to offload the businesses despite a months-long sales pitch highlights the challenges that hosting such services brings in an ultra-competitive marketplace where everyone must do more with less.
CME will retain its United States Swap Data Repository and its Canadian Trade Repository services but that will be of little comfort to its more than 1,000 clients that are now seeking a new home for their EU trade data.
“Historically CME has been the most competitive on pricing, but its departure strongly suggests that the lower price was unsustainable,” explains Ronen Kertis, founder and CEO of Cappitech, a British regtech firm.
CME is not alone deciding the TR life wasn’t to its liking. The market had equally proved too competitive for Bloomberg, which registered a TR with the European Securities and Markets Authority (ESMA) in 2017 but was forced to shutter the business two years later.
The news of CME’s imminent departure was a shock for much of the market and Kertis predicts that it will likely cause prices for reporting services to increase, which may have a knock-on effect on TRs.
If price becomes the key factor, service could be negatively impacted as firms reduce investment to meet lower cost demands, as well as Brexit complicating the process by requiring the formation of new entities on either side of the English Channel.
Filling the void
When the news of the TR closure broke in May, clients were left scrambling to find a new TR, despite CME Group assuring its clients and regulators that a smooth transition and an orderly wind-down of the impacted services would be put in place.
“When the announcement came there was a lot of concern, particularly from some of the bigger firms using CME’s regulatory reporting service that wanted to make sure they were supported post closure and could transfer in time with minimal disruption shut down,” says Michael Leach, managing director of global sales and business development at UnaVista.
Leach explains that TRs that made an investment over the years and are able to provide structure, resources and the right controls in place, such as UnaVista, will be able to provide that ongoing support and comfort for clients. “We have been in a good position where we can migrate customers over from CME and are able to facilitate a simple process for them using our automated CME format converter. We have seen a large number of customers coming to UnaVista to switch,” he notes.
KDPW, the Polish TR and central securities depository, responded to the occasion by developing a special offer for CME clients so they could easily switch to its TR. “We made sure to offer attractive prices,” says its CEO Maciej Trybuchowski.
Likewise, REGIS-TR is also using the opportunity to expand and build out its UK TR hub, which is also essential for its British clients in the context of Brexit.
But, even here, TRs face challenges. REGIS-TR head of business development, Nick Bruce says CME clients need to report to another TR by effectively the first week of November when the TRs close their doors. “There’s a huge number of CME clients that require their business to be taken care of,” he explains, and only a limited number of weekends when REGIS-TR can port them over.
The remaining TRs are welcoming CME’s former clients with open arms but industry experts fear that a bolstered roster of customers may not be enough to shield the community from the challenges ahead, including Brexit and an update to the European Market Infrastructure Regulation, known as EMIR Refit.
A tight Refit
As with all regulatory implementations, the benefit of hindsight brings lessons which can be learnt for future mandates. DTCC’s managing director of repository and derivatives services, Val Wotton, says that is especially true for the Securities Financing Transaction Regulation (SFTR) and EMIR. “Some challenges did occur regarding the timely distribution of the ISO schema and guidelines” for SFTR, he explains, and lessons can be learned from that and applied to the upcoming EMIR Refit.
For example, if ESMA adopts the ISO 20022 standard for the EMIR Refit programme, as it has for SFTR, “we would expect similar tools to be in high demand for that mandate, a trend that would grow as further Refits to trade reporting regulations come into effect in the US and Asia,” Wotton adds.
Firms will need to seek a solution that both reduces costs and manages their trade reporting data needs across jurisdictions.
The purpose of Refit is to address disproportionate compliance costs, transparency issues and insufficient access to clearing for certain counterparties. Its aim is to simplify the rules and reduce regulatory and administrative burdens where possible, especially for non-financial counterparts (NFCs), without compromising the regulatory goal of EMIR.
As of 18 June, responsibility for reporting OTC derivatives trades under EMIR was handed to FCs on behalf of their NFCs that are deemed NFC- under regulation’s new designations.
The NFC needs to confirm whether it intends to self-report to prevent the risk of double reporting, or a failure to report by either party. Flaws in the data transfer methods and general shortcomings in the average level of communication between NFCs and FCs means that this system is expected to lead to issues with duplicated reporting.
REGIS-TR’s Bruce says this issue creates a “perfect storm” and will bring an unprecedented amount of activity and movement to a market that isn’t built to support that number of clients or the volume of trades.
The big break
The next big question on the agenda is how will Brexit throw up barriers and complicate reporting processes once the transition period expires on 31 December?
From 2021, UK entities will no longer be legally obligated to report to ESMA, although they will still be subject to its rules for any EU-related business.
Bruce explains that “the reality is from a regulatory reporting perspective it’s actually very clear”: if you are a TR reporting for a UK entity, the TR has to be a UK registered entity.
“We were ready for Brexit last year, but the further delays has afforded us more time to prepare,” Bruce adds. REGIS-TR UK recently appointed John Kernan as CEO and to the board of directors as part of its preparations.
DTCC has also been in conversations with clients, Wotton explains: “We understand that their IT/testing resources are aligned in preparation for the end of the UK/EU transition period on 31 December, and as expected, the industry has factored in significant resources to ensure a smooth transition on that date.”
Despite the preparations, the split will not be free of downsides. KDPW’s Trybuchowski predicts that Brexit will inflate reporting costs for clients who operate on both sides of the border. To defang the challenge, most UK trade repositories are setting up operations in EU27, and vice versa.
“KDPW will be reporting clients’ trades in the UK in partnership with a UK TR. We have completed our negotiations and will soon be signing a contract with a selected partner. Clients of our TR who trade both in EU27 and UK will then be in a position to report trade on both markets within a single system,” Trybuchowski discloses.
TRs might be ready for Brexit and the issues with EMIR Refit might be clear, but in an industry where margins are razor thin and reporting costs are predicted to inflate, participants must be both innovative and willing to cooperate in order to reverse the trend of market shrinkage.
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