The European Commission's EMIR legislation has passed without a major hitch

The EMIR legislation requires position reporting

New European rules that require banks, brokers and clients to report their daily market positions and collateral values to trade repositories came into effect this week. But European regulator ESMA made no clarification about models, leaving the question of how to report up to the market. That could cause problems, market participants have warned.

Under EMIR, a requirement for financial institutions to report details of their OTC derivatives transactions to a trade repository was already introduced in February. The latest deadline adds the obligation to add positions and collateral values, as part of the overall G20 drive to increase transparency in derivatives markets and prevent a rerun of the financial crisis. However, serious questions are being asked about the value of the data now being collected.

“The transparency aspect is interesting, because EMIR doesn’t say what model to use,” said Rob Gray, head of EMEA sales at Dion Global. “They’re just instilling a habit of reporting, and you can do it any way you want. But the trade repositories can’t make head nor tail of the data that has already come in since February, and no one has been able to publish any meaningful figures that make sense of it all. They have a mountain of data they don’t know what to do with. It has achieved nothing.”

Ostensibly, the idea behind the new rules is that by keeping track of which companies have made which transactions, and which following who has what positions open as well as how much collateral, it will be much easier to understand any threats to market stability and avoid or at least minimise market shocking events such as the collapse of Lehman Brothers in 2008.

But the lack of clarity on standards and formats for the data, and in particular the lack of Legal Entity Identifiers, has already been recognised as an issue for some months. Dion is not alone in calling attention to the issue, which was highlighted by JWG earlier this year. The Futures and Options Association has also questioned the value of the regulatory changes and whether things might have gone too far. While it is possible to outsource some of the reporting requirements to technology firms, the level of regulation that securities trading firms need to deal with is often highlighted as a serious challenge.

“The regulator has made it clear they are more than happy to listen, but I wish they would consult more with the tech firms who actually have to build the solutions,” said Gray. “We could tell them what we are able to do and advise them on how to frame this. As it is, some of these companies are not big banks and they will struggle to find the resources.”

Dion has links with IT firm Confisio and Traiana, which help financial services firms connect and report to a trade repository. Unsurprisingly, the repositories themselves remain upbeat – but even they admit that the challenge faced in reporting may have taken some participants by surprise.

“Despite the significant increase in volumes due to daily collateral and valuation reporting, UnaVista Trade Repository hasn’t experienced any issues and systems are performing well, as anticipated,” said a spokesperson for the repository. “They have also seen a significant increase in the number of buy-side clients that have elected to report collateral and valuation data directly to trade repositories as some brokers are not able to report this information on their behalf.”

Collateral and position reporting is a challenge for retail brokers as it involves reporting thousands of positions – a task that may not be easy for institutions that are already wrestling with other requirements such as MiFID II and Dodd-Frank. Nevertheless, the EMIR regulatory roll-out is not yet complete. Compulsory clearing is expected to take effect next year.