Are you ready for EMIR webinar

Are you ready for EMIR webinar

28 October 2013 - David Nowell talks at the COOConnect Webinar

The European Market Infrastructure Regulation (EMIR) obliges swap counterparties to report details of trades to a trade repository from 12 February 2014. Seven trade repositories have submitted to the European Securities and Markets Authority (ESMA) an application for a licence to operate, of which only those submitted by the Depository Trust and Clearing Corporation (DTCC), REGIS-TR (the Luxembourg-based joint venture between Clearstream and the Spanish central securities depository Iberclear), UnaVista (a member of the London Stock Exchange Group) and KDPW (the Polish central securities depository and central counterparty clearing house) have so far received approval. To help members of COO Connect work out their relative state of preparedness for the coming of trade repositories in the New Year, founder Dominic Hobson moderated a conversation between Amy Freeman, vice president, derivatives clearing sales, at Morgan Stanley; David Nowell, head of industry relations and regulatory compliance at UnaVista, a division of the London Stock Exchange Group; Tim Reucroft, director of research at Thomas Murray IDS, where he runs the CCP risk assessment programme; Thomas Stewart, assistant vice president, relationship management, at Clearstream, a 50 per cent shareholder in REGIS-TR; and Mark Woodward, head of corporate development for European OTC and exchange-traded derivatives at ICE Clear Europe. The webinar began with a presentation on the issues by Tim Reucroft. It is best read in conjunction with the pack of PowerPoint slides distributed with this transcript, or which can be retrieved by going to

Reucroft: Are you ready for EMIR? Probably not. Why have we got EMIR? Basically, it is politically unacceptable to use the tax payers’ money to bail out the financial sector – that, say the regulators, is never going to happen again. That in turn means two things. First, the industry mutualises its own risk. Secondly, whatever is left over goes into the big banks. What we are talking about today is the first initiative, whereby the industry mutualises its own risk, and they do that through CCPs. CCPs work fantastically. Generally they do not go bust, and they do mitigate the risk, and nobody else has to bail out what goes wrong in an exchange where there is a CCP involved. So this is the silver bullet that politicians have for solving all of our problems. So we take all these OTC derivatives and put them through a CCP. That is effectively what EMIR is doing.

What is EMIR? It is called the European Market Infrastructure Regulation - the emphasis is on regulation. What this means is that EMIR is fairly draconian, and it is implemented everywhere across Europe. It is not negotiable. There are no level three implementations - there is level one (which is EMIR) and then there is a level two (which is ESMA). So ESMA has been mandated by the European Commission to come up with all the detailed rules for the implementation of EMIR. EMIR itself is about 85 pages. That is not as bad as, say, the Dodd Frank Act, which is 848 pages. It is a fairly digestible piece of legislation, but the ESMA detailed background to it is enormous and still on-going, as we will find out.

EMIR has four main components: mandatory clearing, CCPs, trade reporting and risk mitigation. The first three are connected. If a trade is not CCP-cleared, then you still have to put margin up for non-cleared bi-lateral business that you are currently doing. You have to appoint a clearing broker to do that for you, because you are fund manager, not a member of the CCP. So you have to go through an intermediary. You have to appoint a clearing broker to get access to the CCP, and then you then have to report those transactions. And that reporting is for everything. The big issue here is that everybody is caught by trade reporting. Anybody that is doing an OTC derivatives contract is caught by trade reporting. The only people who get let off this obligation are central banks and individuals. Anybody else is caught by trade reporting. This includes all the corporates - many of which do not even know about it yet. The fourth piece is something called risk mitigation. This means making sure that margins and collateral are moved and that trades are reported, and you do compression, and things like that.

The main emphasis in what we are going to talk about today is the first three: mandatory clearing, CCPs, and trade reporting. That is what EMIR is essentially all about. Slide 4 shows the timelines. It is a little complicated, but there are thresholds, and the time lines are constantly moving. There are not very many fixed dates in the legislation. 12 August, 2012 was a fixed date. 15 March, 2013 was a fixed date. And 15 September 2013 was a fixed date. Everything since then is not fixed and is moving quite a lot. The big problem with all of this is that some of the things that we need to do to make EMIR happen have not happened and the deadline has slipped.

ESMA announced which trade repositories it was going to approve by 7 November 2013. [DTCC, Regis TR, UnaVista and KDPW were approved on 7 November 2013.] Mandatory trade reporting will then start on 12 February 2013. If the November date had slipped then the reporting date for 12 February would have slipped too. Approving some and not all repositories is an issue because it gives those trade repositories an unfair advantage over all the others. Ideally, they would all be authorised together. The CCP authorisations are due by March 2014. The first were expected by end-October 2013, but there were none authorised by then. Obviously, you cannot do mandatory clearing until ESMA has authorised the CCPs.

So there are a lot of dependencies. As ESMA is delaying the authorisation process, that means the mandatory consequences of that are also delayed. So the timetable for EMIR is constantly slipping. I have seen some news items now predicting that mandatory clearing will not happen till 2015. So the question for fund managers is: why would you take it seriously?

You do all this work to get yourself prepared for it, and then all of a sudden the deadlines move. Why would you sign up with a trade repository now on 28 October and find out on 7 November that actually it cannot get a licence? So this is a real problem for people out there and I sympathise with fund managers who are deciding to sit back and not do anything until they absolutely have to. The trouble is, that risks leaving it too late. Because there is an awful lot of work involved in doing all of this, and in some areas there is no date set at all. There is a real problem for bi-lateral transactions, where you have put up collateral or margin funds. Yet so far we have not even decided what the margins are going to be for non-cleared contracts.

We still have not decided what contracts are going to be cleared. We are pretty sure it is going to be interest rate swaps and credit default swaps but if it is FX, watch out. That could be a real issue, because in Europe it is not all euro. There are some countries in Europe that are not in the euro – the United Kingdom, for instance. So, those are the asset classes - credit and equity, so far as we know.

In terms of managers clearing swaps, there are certain thresholds and they vary by asset class. The question you need to ask yourself here is, `Are you a financial counterparty?’ If you are a financial counterparty, then you are going to be subjected to mandatory clearing, there are no exceptions or thresholds that you can make use of unless you are a pension fund and then there is an exemption until August 2014. But, if you are financial counter-party or fund manager and you are not a pension fund, you cannot use the hedging exemption or the threshold.

If you are a non-financial counterparty - say, a treasury department or corporate – the position is different. There are two categories that are not financial: NFC (NFC, non-financial counterparty) plus and NFC minus. Derivative transactions which hedge financial or commercial risks may be exempt from mandatory clearing. But there is a threshold. If you exceed the clearing threshold, you need to centrally clear those of your OTC derivative contracts that are subject to the clearing obligation, but not all derivative contracts count towards the threshold. If you are not doing all these OTC derivatives contracts for hedging – i.e., some of them are for trading purposes - and you exceed the threshold then you are subject to mandatory clearing. If you become an NFC minus you are still subject to mandatory trade reporting. So whether you are NFC minus or an NFC plus you are also subject to mandatory clearing.

So every corporate in Europe has to decide whether they are a NFC plus or minus. If you are NFC plus, there will be big consequences. If you are NFC minus, you still have to do trade reporting. Nobody gets out of trade reporting other than central banks and individuals.

If you are going to do mandatory clearing, and you are a fund manager, then you need to appoint a clearing broker to do this for you. The easy option would be to use the clearing broker that you already use to trade derivatives. Now, that might be an option, but they may have a completely different business model from the model that does clearing for OTC derivatives. They might not be particularly strong in OTC derivatives. They might not clear at the CCP that you prefer to use. They may not have the technology and functionality to be able to support multiple CCP choices. So just choosing your existing clearing broker for your OTC derivatives clearing might not be the best solution.

There is a whole series of issues and considerations you have to take into account to decide who is the most appropriate clearing broker. One problem is that you need to have two clearing brokers to achieve portability of your positions and collateral in an event of default by your clearing broker. The regulators are also pushing individual segregation of collateral, so that in the event that your clearing broker goes bust, your accounts are individually segregated at that clearing broker. You can therefore move your account from one clearing broker to another. That is called portability.

So your clearing broker goes bust. You say, `Thank you very much. Goodbye. I am going off. I am going to port to another clearing broker within a day or so.’ So you do not actually care who your clearing broker is. You are not worried about his credit risk because if he goes bust you can go somewhere else. To be able to do that you have to have a secondary clearing broker. A contract with that secondary broker needs to be in place if you want to move within a couple of days. So, to achieve portability and to take advantage of individual segregation of accounts, you must appoint a secondary clearing broker.

This is a real problem if you have only got a small book of business. How do you make it attractive to the clearing broker to do this? Because you get on to them and they say, `Actually, this is not very interesting, and I am very busy, so unless you want to pay my minimum fee, which is actually quite expensive, then I am really not interested in your business.’ That is a real problem. You need to start having those negotiations now. You do not want to find out about that when it is too late, and suddenly find that your exchange-traded derivative (ETD) broker is not interested in doing your OTCs, because your book just is not big enough for them for mandatory clearing. Have they got the capacity? I would imagine Morgan Stanley, for example, has a lot of work on right now, taking on board all of these clients who are subject to mandatory clearing. If you come along now, you are going to be at the back of the queue. It is not a good place to be.

You may also want to do your own due diligence on CCPs, and select your own CCPs. You might take the advice of your clearing broker on CCPs, but bear in mind the clearing broker is probably conflicted on this because they own and control the CCPs. The clearing broker will have a preference for a particular CCP which might not suit your preferences. So you need to do your own due diligence on CCPs to figure out which ones you want to use. There are not that many doing credit default swaps or interest rate swaps, so you do not have a great deal of choice. The problem is that CCPs are commercial. This is the first time we have seen commercial incentives in market infrastructure. There is intense competitive activity between infrastructures. EMIR has guaranteed that, so the CCPs are competing vigorously now for business. The question is, ‘Will they survive? Will they build a viable business model?’ These are major issues. Even more so with trade depositories, which most CCPs own. So when you look at the CCPs, it is a nightmare, because what is a “qualifying” CCP in the estimation of ESMA? Nobody knows what a qualifying CCP is. I would challenge anybody to tell me what it is. There are a few CCPs out there who have self-qualified themselves.

CCPs have to make sure that they have got the right kind of capital in place, and can protect customer assets through individual segregation, and so offer portability. There are all sorts of different types of individual segregation out there. The regulators have been pretty tough and pushed back on some CCPs in Europe, saying, `No, that individual segregation model is not satisfactory. Think again.’

Margin models? You might think that margin models are all regulated, and that in Dodd Frank and EMIR it is all pretty much the same, with close-out periods well defined by the regulations. You would be right. While I will not go into the technicalities of it, margin calculations are pretty much defined by the regulation. So why worry about different CCPs? Well, you would not worry were it not for the margin offsets. If you go to X-clear in Switzerland, every security is offset with every other security, and you offset the whole portfolio. If you go Cassa di Compensazione e Garanzia (CC&G) in Italy, and the offset model is completely different, creating a completely different risk. There are lots of things you need to worry about when looking at CCPs. The biggest problem that we have found at Thomas Murray IDS – and we rate 36 CCPs globally - is equity capital. There are some CCPS out there that are not fit for purpose.

Trade reporting, if all goes according to plan, starts on 12 February 2014, which is not a long time away, and we have Christmas between then and now. The same OTC derivatives which are subject to reporting in the US are subject to reporting in Europe. But in the US it is only one side of the trade which has to report, while in Europe it is both sides of the trade that have to report. The obligation is on you as the fund manager, and as principal to the contract, to meet your legal obligation to report the transaction. Sure, you can delegate it, but the responsibility still remains with you.

The other problem here in Europe is that exchange-traded derivatives (ETDs) have to be reported as well. That causes a complete nightmare, because it puts EMIR at odds with the Markets in Financial Instruments Directive (MiFID). I will not go into the technical reasons why, but if an ETD has to be reported, then almost certainly you will delegate that to somebody because a lot of managers out there have a big book of business in ETDs but only small book of business in OTC derivatives. If you report the OTC derivatives, but not the ETDs, that is a major issue for you, so you have to watch that one.

Trade reporting is the first thing that is really going to bite you. It starts on 12 February 2014. Mandatory clearing is going to come a lot later. It is trade reporting that is going to bite. You have to appoint a trade repository and report your trades to that trade repository. So as far as we are aware at Thomas Murray IDS, seven trade repositories have applied to ESMA for licences [see Slide 12, which includes a list of trade repositories]. Not all of them have yet succeeded in their applications. [DTCC, Regis TR, UnaVista and KDPW were approved on 7 November 2013.]
The problem I have with all of this is that ESMA has mandated trade reporting, and yet they are looking for a commercial solution. I have no idea whether trade repositories are going to make any money out of this or not. If they do not, what they are going to do - because there is no obligation for them to carry on - is pull the plug. It is a big ask from the regulators to rely on a commercial solution.

To conclude, from where we sit in Thomas Murray IDS, helping fund managers select clearing brokers and CCPs and trade repositories, I am concerned that there is not enough happening. We think there are a lot of fund managers out there who have not done enough to meet the EMIR requirements, and some of the deadlines are looming large. So you need to get in the queue now.
Hobson: Thank you, Tim. I had the feeling you could go on even longer, and that we were only scratching the surface of your knowledge. But we do not have all-day so let us talk about some of the things you raised. Now, Amy, one of the things that Tim said was that the dates are all over the map, and you could even make a case that managers should forget about all this till 2015. Would that be good advice? And, to his last point, what sort of client activity are you seeing right now to prepare for EMIR?

Freeman: I definitely would not say it is good advice to leave things to the last minute. While we see the timing of mandatory clearing being somewhat pushed back in Europe, we are looking forward to an end 2014-15 timeline for this. Nevertheless, from a Morgan Stanley perspective, we have been live and clearing for clients for a number of years now. In the US mandatory clearing has already been introduced, so for the in-scope rates and credit products all clients are now clearing those under the rules. Here in Europe we are seeing a number of clients going live ahead of the mandatory timelines, for a number of reasons. For example, banks will be subject to capital requirements in 2014, so they are getting ready to benefit from the lower capital risk allocation rates they get from cleared activity. Clients that trade with those banks will also see a pricing benefit from being able to clear their trades sooner because banks will be passing their capital requirements through those trades on to their clients. Hedge fund managers, and the asset management community in general, are also moving forward. From a hedge fund perspective, we are seeing a number of clients who have gone live with the US rules, and a number of clients in Europe who are getting ready and getting started with clearing. For asset managers, there is a huge amount of underlying funds to on-board. It is a really important preparatory element, and leaving it to the last minute just is not an option if you have several hundred or a thousand funds to on-board. We are going out and talking to a lot of clients about getting ready for clearing, and what sort of time frame they have in mind. Ultimately, we would advise clients against leaving it to the last minute because, with our experience of mandatory clearing in the US, the market was squeezed in terms of CCP providers, although we certainly experienced no problem in terms of getting our own clients ready for the key day. That is why we say, to put yourself in the best possible position, moving forward as soon as possible is really the right action to take.

Woodward: I would echo what Amy just said. A lot of clients are ready or getting ready to start clearing. Clearing is not new, and a lot of fund managers are used to clearing as part of their business, be it their exchange-traded or some of their OTC business, which can now be cleared through a variety of different offerings. So a lot of people are already there in terms of clearing. A large amount of client business has gone through. I have seen it both at ICE and ICE Europe. Clearly, however, some are being caught by the speed of the clearing mandate. The important lesson to learn - particularly around what investment you need to make in order to get up and running – is to make sure it is done as early as possible. The other important point is that a significant number of hurdles, which people have talked about in order to delay moving into clearing, are now falling away. For example, standard documentation is there. The CCP structures are in place. So are the capital rules. So gradually the various bits of the jigsaw are falling into place, which allows fund managers and other participants to get ready.

Hobson: What about middleware? Has that been an issue which you have encountered in terms of clients and their clearing brokers hooking up to your services or not?

Woodward: Not to date, but I think that is because a lot of work has been done over the past few years. Take credit default swaps (CDS), for example. If you are preparing CDS for clearing, that service has evolved a lot over the last seven or eight years. It is not something completely new, or which has just happened. Some of the service offerings to enable clearing to happen have come at the latter end of the programme, but standardisation of contracts, middleware vendors getting up and running – these things have been evolving to get to the point that we are currently at. We are at an interesting point at the moment, where clearing services are out there and we have an obligation or mandate that has either already come or is going to come soon. Some people are still waiting for that obligation to fall on them.

Reucroft: The clearing brokers have been clearing credit default and interest swaps for years. It is client clearing that is new.
Freeman: We talk about some of the pressures we have seen in the market. That is because we have seen key dates set out by the US regulators. We have a March date, a June date and a September date, by the end of which the whole market will go live. The biggest volume of clients was in June. What we say is, try and use that experience that we have had in the US. We emphasise to clients here in Europe that, when we start to see those implementation dates, you will see a pressure point around those dates. So just move forward as soon as possible. That is key.

Reucroft: How long would you like to have with your end-clients to prepare them and make sure they are ready, and decide which contracts to load, which ones to compress, and what back-loading to do?

Freeman: It really depends on the client. Whether you are a bank or a hedge fund. Maybe you only have one legal entity, so there is only one document that you need to sign for that process. Where you are institutional, and there is a number of underlying funds, the process can take a lot longer. We say up to three months potentially for the documentation of a single legal entity. You can roll that out to a longer period, depending on the number of funds. If a client is not on-board with a middleware platform, which is a precursor to clearing because the middleware provider provides all of the connectivity between the CCP, the clearing broker and the client, you can add another three months to on-board with those platforms. Again, signing documentation with those platforms is part of the system that creates pressure points around going live. From a strict on-boarding perspective, we can open an account within five days of signing documentation, but the documentation does tend to take a period of time before that. Depending on where clients are on the learning curve of clearing, we may spend a significant amount of time running up to that final on-boarding point in workshops that cover the legal documentation, the operational arrangements, the margin requirements, and the connectivity. Lately, we are spending a lot of time talking to our clients about the segregation requirements in different CCPs. What it all means is that it is a very short period of time that it takes to go live for clearing.

Reucroft: There is a minimum of six months and probably nine.

Freeman: We have on-boarded clients in a matter of days, when we were going through mandatory clearing in the US. But in doing so the client has much less flexibility around the terms and conditions within the documentation. Give yourself the greatest possible amount of time for negotiating the terms that are ultimately accepted by the clearing broker - the longer the amount of time the better.

Reucroft: Mark mentioned the standardised documentation. Presumably that is the Futures Industry Association (FIA)/Futures and Options Association (FOA) document drawn up by the industry associations in the United States and the United Kingdom?

Woodward: There are a number of different standardised documents actually to help the process, depending on where you are. One of the big initiatives is being led by the FIA in the US and similarly the FOA in Europe. The German banking authorities have their own documentation for the German market as well. One thing we quite rightly emphasise is that the `R’ in EMIR stands for `Regulation,’ which means there is no room for variation at the national level. There is still a lack of harmonisation in insolvency law between member-states of the European Union (EU), so that is clearly an added complication.

Hobson: We have had a question from one of our listeners, which is as follows: `We are established outside the EU but trade with the EU counter-parties. We fall within the 1-100 OTC derivatives threshold. How frequently are we required to reconcile our portfolio and what will be the first date we need to reconcile?’

Freeman: The reconciliation and dispute requirements came into force on 15 September. The way that the market dealt with that is largely by having an International Swaps and Derivatives Association (ISDA) EMIR protocol for portfolio reconciliation and dispute resolution. For clients to adhere to that protocol, they could go to the ISDA website. They could adhere at once, and it would apply to all of their counter-parties. Now, for this particular requirement for clients outside of Europe – unfortunately, whilst they are not caught directly within the EMIR requirement, because they are caught on both sides of the trades it means that they have to meet the requirement in order for their European counter-parties to be in compliance with the rules. In terms of the frequency of reconciliation, I believe it can be quarterly.

Reucroft: I think six monthly, so you do not have to start worrying about this until March 2014. That would be the first time you would have to do reconciliation.

Freeman: From a reconciliation perspective, and then in terms of meeting the requirements as they are in force right now, we would advise going to the relevant ISDA web pages and adhering to the protocol. It is the most straightforward means of meeting those requirements.

Hobson: I think the answer to that question is every six months. You need to worry on 1 March 2014 and then again in September 2014.

Reucroft: Yes, that is right. As a non-European, its European counterparty will have to classify them. It will need to know whether their financial counterparty is an NFC-plus or an NFC-minus. I am assuming, if we are discussing a fund manager, that it is then obvious that it is a financial counterparty. But if you are a European broker trading with a Korean corporate treasury operation, then that Korean corporate treasury operation has to tell the European broker counterparty whether they are NFC-plus or NFC-minus. That Korean corporate treasury operation is not going to have a clue about what to do in terms of reconciliation and reporting.

Hobson: It is a good opportunity to bring in our colleagues on the reporting side. We have got a couple of questions and I will ask Thomas to answer this one first. `For reporting, do you think we will have a big bang for asset classes or a roll-out as was previously planned?’ What do you think the answer is?

Stewart: That is an interesting question. There initially was a roll-out when interest rate and credit derivatives were reported, with a three month gap for the other asset classes. Due to the way the regulations have been drafted, and the postponement and changing of the dates, this has disappeared. So in the current draft of the regulation, all asset classes will be reported from 12 February. Now, as we discussed earlier, the European Commission has mentioned they will not accept exchange-traded derivatives being postponed, even though ESMA asked for them to be delayed by one year. They have mentioned it might need a re-drafting of regulations, which will take a long time. It might make sense to re-establish the gap between interest rates and credit, as a lot of entities were running their projects with this in mind to use as a tester. But I think everyone has to plan for a big bang at the moment.

Freeman: Clearly, there is interaction with the reporting requirements under AIFMD for funds domiciled outside of Europe. There is a number based in Cayman with a European manager. Those managers have until 22 July 2014 to register under AIFMD. But the reporting requirements under EMIR may come in from February or may be pushed back until July. For hedge funds, there will be a big bang in July 2014 when registration under AIFMD bites.

Hobson: David, you have listened to Thomas and Amy. Does what they say match your understanding?

Nowell: Yes it does. I think we have got to assume there will be a big bang approach for asset classes as that is what ESMA said. The interesting question will be as to whether OTC and ETD go live together. I think that has bigger implications for investors.

Hobson: I am glad you said that David as we have another question. It is as follows: `Is it official information that ETD reporting will start in February 2014 and not January 2015, or can we wait until next year for ETD reporting?’

Nowell: The European Commission have got another two weeks to make a decision – until 6 November 6. Certainly the messages coming from Patrick Pearson sounds like the one year delay will not happen, but it is still all guesswork and that is all we can do at the moment. My personal opinion is that there is a 70 per cent probability that ETD will go live with OTC. [On 7 November, the European Commission announced that both OTC and ET derivatives will have to be reported from 12 February 2014, overturning the ESMA plea for a one year delay in implementing reporting of ETDs.]

Reucroft: Will that be single sided or dual sided trade reporting?

Nowell: Again, this is my personal opinion, but I believe it will be dual sided. I do not know how they can go to single sided. It is quite clear from the Level 1 text it has got to be dual sided.
Stewart: I think we should also encourage the market to assume the deadline of 12 February 2014 is there for both OTC and ETD as well. I do not think it is good for anyone to sit in hope that it will go to January 2015. If it does go to January 2015, that will certainly be good, though.

Woodward: I think the only firm planning we can make has to be based on the facts we have today.

Reucroft: That is where the main difference is to the US, where ETD is not reportable as part of Dodd-Frank, and just the CCP would report. In Europe, the principal to the ETD contract has to report for matching at the trade repository too. That is a real issue.

Hobson: We have another question from a listener. `We are a US person clearing under Dodd-Frank and do not fall under EMIR. But if we do trade with a counterparty that does fall under EMIR but we have a cleared derivatives execution agreement and we clear via the US clearing model, does that fulfil EMIR obligations to clear, i.e. does that cleared derivatives agreement do the job for US firms active with European counterparties?’

Freeman: That is a detailed question. There is a huge amount of complexity with the extraterritorial provisions of Dodd-Frank and EMIR. To what extent does Dodd-Frank reach out to us in Europe and vice-versa? If the client is a US person and clearing in the US as part of US regulation, where it trades with an EU counterparty, EMIR will apply to that particular trade as the European counterparty will be caught by that. So does clearing under the US model in what is known as the FCM model. Does that count as sufficient from an EMIR perspective? The picture is not completely certain. We have seen European regulators make what is called an equivalent assessment of the US rules, so they have checked to see if there is consistency with the clearing obligations, dispute resolution, and risk mitigation. Broadly, ESMA concluded the US rules are equivalent but the whole process has to be passed to the European Commission to be ratified. ESMA has to determine the US to be equivalent by looking at the individual CCPs, so a second stage will be to look at individual CCPs and see if the authorisation of those US CCPs under ESMA. Providing there is equivalent regulation, the CCP will be recognised under the EU regime, and it will be sufficient for US counterparties trading with EU counterparties to meet ESMA requirements.
Hobson: That was a very detailed question and a very detailed answer. If this client came to you and asked for advice, what advice would you give?

Freeman: The long answer is the most accurate answer, but we cannot advise as I am not a lawyer. What probability would I assign to this working out in the long run? I would have to say I have confidence that the regulators will come to a sensible conclusion regarding extra-territorial provisions, given the international nature of the markets we are talking about.

Hobson: But you can see the anxiety this manager has. Will we have to comply with EMIR by association? How will it work for OTC products, as we cannot clear the same trades via two models?
Freeman: I think a number of clients are grappling with this question as we speak. A number of EU funds are deemed to be US persons even though they are based here in Europe. They are deemed to be a US person if they have US investors or trade with US counterparties. But when they look at EMIR requirements and say, at least with that set-up, can it be sufficient to comply with EMIR? This is an on-going question from a regulatory perspective and we hope the regulators will come up with a good answer and say that, if your set-up under the US model and the EU model is similar, having to separate activities between US and EU counterparties does not seem like a sensible outcome.

Reucroft: But suppose FX is subject to mandatory clearing in Europe but not in the US. Would that affect peoples’ behaviour?

Freeman: If we are talking about FX, we expect FX spots to be excluded under the scope of EMIR and forwards not to be cleared. Non-deliverable forward (NDF) clearing is happening globally under Dodd-Frank and EU rules.

Hobson: Before we leave this question, this registrant has asked a follow-up question. It is: `This also poses questions for trade reporting. If we do not fall under EMIR, will we need to report because the other side of the trade is a European entity?’

Woodward: Again, I have to echo the fact that we could not give legal advice. But, often, if the other side is not an EU entity, then it does not need to report, but the side that does fall under EMIR in Europe does need to report.

Nowell: Yes – I mean, with exactly the same caveat, that echoes my view. Anyone outside of Europe does not need to report. That also chimes with the inter-TR reconciliation that all of the TRs will have to do. There is a flag there that highlights the other side or other counterparty as a non-European Economic Area (EEA) counterparty. If we see that, we will not try to pair the two transactions. That is my view.

Hobson: We have another reporting question. `Is there any update on a sell-side delegated reporting offering for OTC and ETD trades? For example, Morgan Stanley is reporting on behalf of its clients, and it is something we have seen a lot of fund managers want their clearing brokers to do. Is this going to happen or will it be the role of the CCPs?’

Freeman: Our view is that the reporting requirements are challenging for a number of reasons. I guess, when we talk about reporting, we are talking about the full sweep – ETDs, OTCs that are held bi-laterally between counterparties and OTC derivatives that are cleared. For ETDs and cleared derivatives, because of the systemic nature of those products, they are cleared by the CCP and held at a middleware platform in regards to the trade data. The reporting requirements are straightforward for these products. Unfortunately, clearing comes later than reporting. So, for those clients we are live for, clearing will not necessarily mean clearing the entirety of their portfolio. That means their ability to report all of their cleared derivatives is challenging. Similarly, on bi-laterally executed, if clients are looking for a consistent outcome they need all of their counterparties to do the same. From a Morgan Stanley perspective, we are reviewing the possibility of providing a reporting product for clients.

Hobson: So the answer is you do not really know yet but you are not terribly enthusiastic at this point.

Reucroft: There is a liability issue. The principal to the contract, which is a fund manager or a hedge fund manager, is strictly liable for reporting these transactions. They can delegate it to somebody like an execution broker or a clearing broker. For ETDs, maybe the CCP can report some of these transactions. But this is an interesting point, and one I would put to the trade repositories. This notion of third-party reporting is emerging. Fund managers or hedge funds doing their own reporting will still need to set up their own Legal Entity identifiers (LEIs) and join a trade repository for a group LEI, and then pay. Or they could go to a third party reporter. I believe there is one in Sweden where they will consolidate all the reporting on behalf of Swedish funds and they would pay for only one LEI to the trade repository, as they are reporting as aggregators. Have you seen that?

Stewart: Certainly. But what needs to be mentioned first is that you can delegate reporting but not the legal obligation, so you need to make sure you delegate to someone who can do it and then make sure they do it. That means third party reporters need access to the information. We are seeing entities coming on as third parties. They have relationships with trade repositories in which they are reporting on behalf of underlying LEIs that do not need to be members. But there are opportunities for LEIs to view the information, so they can see it has been done and is reconciled. Or there could be a membership where they can enrich this information if the vehicles do not have access to information such as hedging or speculation, which the third party may not know. The preferential situation would be where the majority of information is sent in by a third party but the entity that needs to do the reporting has access to and can enrich the information and make sure reporting is done and the legal obligations are covered, and they can do their own reconciliations. There are third party entities out there but people need to look at the complexities it brings. You need to make sure you have all the information and control and make sure they do not do it wrong.

Hobson: Is it you view then that managers would be better off doing it themselves, given they have to do all the work to assemble all the information anyway?

Stewart: We are seeing more and more managers looking to do it directly because they want one entity to do it. There are so many entities and to control all of that is very complex, especially with delegation. Some are realising that maybe “I can control and do it myself directly.”

Reucroft: Does that have an impact on your business model if third party aggregators are taking revenue away from the trade repositories?

Nowell: Yes it does a little bit. When it comes to delegation, we can offer a number of different models. We can offer full delegation, delegation of the common date, and partial delegation, whereby counterparties can see some of the data and enrich parts of the data, but there is a risk these aggregators could cannibalise some of our client base.

Woodward: Within ICE Clear, we have integrated our trade repository. We deal with a lot of requests from clients on the phone, particularly corporates which are struggling with this problem. If it is a problem you can help with, it is logical. I would be surprised if no trade repository was looking to provide a delegated service, and we are seeing that.

Nowell: It makes it difficult for fund managers. When they talk to clearing brokers they need to know what services their clearing brokers are going to offer. And we see that dilemma, and some of the clearing brokers speak to us about it, and want the delegation model. Fund managers talk to us and do not know whether to commit or whether their clearing broker will report on their behalf. So there is a dilemma in the market.

Hobson: We have talked about the Swedish group. Are there are a lot of third party service providers that are not repositories queuing up to do this work as aggregators?

Reucroft: I do not think it is necessarily a lot but if you are in Scandinavia, and if you are a SimCorp Dimension user, they will offer the service as they have got the information.

Hobson: So it might be a software company already offering this service to fund managers? You brought up LEIs. What is the status of UPIs and UTIs?

Reucroft: UPI is Unique Product Identifier and UTI is Unique Trade Identifier. When you look at the ESMA reporting requirements you have got a lot of data and you have got to populate a field with a UPI and a UTI. The problem then is that it has got to match with the UPI or the UTI your counterparty is reporting so the trade repository can match it. Where do you get the UPI from? Well hopefully you can get it from ISDA. ISDA is custodian for all of the UPIs. A problem is that, if you have got a whacky OTC derivative where ISDA has not issued a UPI, I am not sure what you can do. With UTIs, you can get those from an exchange or matching software or middleware provider. If both sides can report the same UTI, it makes life easy for the trade repository. If you are in the FX business, where middleware providers do not exist, then you need to decide with your counterparty what you need to get as a trade identifier to assign to each FX transaction. UTIs are an FX problem only, and not a problem elsewhere, while UPIs will be solved by ISDA.

Stewart: A UTI is an up to 52 character unique identifier that is applied to every trade, and it has to match with the UTI of the counterparty. It is a complex job to get it to match. You can delegate the creation of a UTI – for backloaded trades, we can create a UTI - and then discuss with your counterparty what UTI to access. It is a tough ask. On the UPI, we are a lot further away from a solution. Hopefully, by the time the reporting obligations start in February 2014 we will have something in place.

Woodward: The UTI is hugely complex. But, speaking from a clearing point of view, when we net trades at the end of the day to create a position, it adds another level of complexity. We are not talking about trades but positions, which will affect the UTI.

Hobson: We have had another question from a listener. It is: `There might be a trade repository not yet ready to deal with ETD data. How likely will ESMA give it partial authorisation?’

Nowell: That is a tough question - indeed, an impossible question. It is impossible to answer the question without knowing the requirements. With the ETDs, we are in a strange position where we have not got the fundamental building blocks. We do not know what UPIs will be. It is my personal view that they will be partially ISIN codes. I do not know about the UTIs nor the trading scenarios. We only have two trading scenarios in the Q&As, and they are the most basic trading scenarios possible. My gut feel is those trade repositories which applied for ETD and OTC have to demonstrate they are capable of doing so.

Hobson: We have had a number of questions on the reporting side which suggests it is an important issue. This one reads: `I have not yet seen a middleware offering that can deal 100 per cent with the matching UTI requirements. How do you propose that managers reporting both ETD and OTC derivatives manage their reporting obligations if one or more of their managed accounts clearing brokers does not sign up to a middleware provider? How do you do this if the clearing broker does not want to sign up to a middleware provider?’

Reucroft: Change clearing broker.

Freeman: From where the market is right now, you have to have the middleware provider to access the clearing functionality, be it MarkitWire or Bloomberg VCON that has connectivity. I have heard of a number of platforms supporting these functionalities.

Hobson: How many of these do you support at Morgan Stanley?

Freeman: We support all of the available services.

Hobson: How many are there?

Freeman: I have mentioned the key three. There is Traiana and CME Clearport too, and they are providing middleware functionality, but they do not access a whole product suite available for clearing. Some providers are looking to provide reporting functionality. So once a trade is affirmed on MarketWire, to take an example, MarketWire will send the trade information to the trade repository. It really will be a conduit rather than a reporting functionality as there will be some data on that trade that will not be on MarketWire, like the requirement under EMIR to report collateral associated with positions and valuations. And once the search is affirmed for clearing, the role of middleware is limited. So once managers know the middleware details, they need to consider using them as a conduit functionality to the repository.

Reucroft: And SWIFT is not a solution?

Freeman: it does not have middleware for clearing functionality and I think not for reporting either.

Reucroft: It is a whole new ball game for fund managers.

Freeman: It is a huge change to their activity and we have highlighted the complexities in the room. Within each product set, the requirements are different.

Hobson: Here is another question from a listener: `It appears to be a solution to trade repository reporting whereby a third party like MarketWire sits between the fund, counterparty and trade repository. This needs buy in from all the counterparties, so is it a sensible solution? Will it drive people onto a single middleware solution?’

Freeman: It is a challenging question. In an ideal world, there would be something central providing this solution for everyone, and that would be a great outcome for the market. At the moment, this does not exist and these middleware providers, clearing brokers and trade repositories and their clients need to consider the way they address the problems on an individual case by case basis rather than rely on something central.

Hobson: Why cannot they exchange information in a standardised format?

Reucroft: The whole thing is a complete and utter joke. The European Central Bank (ECB) went out and designed T2S, which nobody wanted, cost the industry a fortune and will not succeed. If the ECB provided the trade repository instead - a single trade repository – and a single middleware solution for the whole of Europe, and designed it and gave it to market, and said, `Use this trade repository and middleware,’ there is your solution. Europe is in a mess and the US is home and dry. They have had the Depository Trust and Clearing Corporation (DTCC) Trade Information Warehouse for years, and people linked into it. It is a well set-up piece of infrastructure. It was obvious something like this was coming to Europe, yet the ECB did nothing.

Hobson: Are we in a transitional stage?

Reucroft: We shall eventually get there.

Woodward: There are other service providers out there, over and beyond the DTCC, providing trade repository services. But there are differences between the US and Europe. Trade reporting in the US is for OTC only. It is also single side reporting only.

Hobson: Another question from a listener: `Can you confirm an NFC must report all OTCs as well as trades in derivatives listed and cleared on an exchange?’

Freeman: An NFC is a non-financial counterparty, which in plain English means a corporate entity. So that is someone that is not a financial counterparty. The corporate world is split into NFC plus and NFC minus, and those entities trading OTCs on a non-hedging basis above a certain threshold do at the moment have to report. Now that is something which is going to be challenging for the OTC derivative community. We will be reaching out to other service providers, like clearing brokers and middleware companies, to help NFCs with their reporting requirements.

Reucroft: These people do not even know about it. A friend of mine is a COO at a FTSE-100 company and we were having a beer, and I asked him what he was doing about EMIR, and he said he would have another. What springs to mind, just because of the timing, is that the Securities and Exchange Commission (SEC) is having a go at the Options Clearing Corporation (OCC), and if you look at their accounts it is pretty obvious why. The thing is, if you are a fund manager, you want to say to yourself, `Well, I am putting my money into a CCP and the CCP is run by the brokers for the benefit of the brokers so where do I get anything out of this?’ There is a major tension between a beneficial owner that is interested in low margins and high default funds because it is the clearing broker that puts up the default fund, not the beneficial owner. Clearing brokers want high margins and low default fund contributions. That is a quite interesting tension dynamic in the CCPs at the moment. What we have found as part of this exercise on EMIR is that the whole mind-set of the CCPs is changing. In the past they were run by the clearing brokers for the benefit of the clearing brokers and it all worked fine. They did not even know who the beneficial owners were. They did not even care. They did not know what an end-client looked like. Now what has happened with EMIR is that it is all about end-client clearing. The CCPs are scrabbling around trying to find out who these clients are and what their buying criteria are and what their risk appetite is like. I think it is early days in all of this but there are lots of competitive pressures going on between the CCPs. Part of that was over the individual segregation model. We have had this Legally Separate but Operationally Commingled (LSOCV) accounts compromise In the US, while over here you have accounts which are legally and operationally segregated. CCPs in Europe have different segregation models. ESMA turned around and said, `Sorry, guys.’ What ESMA has done, and all credit to them, is to force all the CCPs in Europe to adopt a model which gives you a lot better level of protection than you get in the US with the LSOC model. There are technical differences between the various options, and you need to understand them - and to understand them, you need to do due diligence on the CCP.

Hobson: Mark - do you feel you are facing hideous competition in areas you should not be facing competition like collateral, margin methodologies, and collateral segregation?

Woodward: No I do not think so. Generally, in the business we always welcome competition and I think some of the points Tim made are interesting in terms of how people are looking at CCPs. I think it is really important that fund managers and end-clients are looking very carefully at CCPs but, most importantly, at their brokers as well. That is because the brokers are the routes into clearing. It was interesting that Tim made a comment earlier that actually it does not matter who your clearing member is because your assets are already sitting in the CCP. I would challenge that. One of the fundamental risk protections of all is that it is always going to be against the clearing broker who provides your entry into clearing. I think it is very important, as part of introducing the clearing mandate or clearing obligation, to start looking much closer at CCPs, how their structure is, how their risk management works, etc. One of the challenges for us as a CCP is that, if you look at the way EMIR is written, it is actually quite restrictive in some areas, because there will be a level of prescription. If we look at margin rates and guarantee funds etc., there is a very clear framework that the regulators have in mind that they want the CCPs to fit into. I think that is going to create great difficulties for CCPs in certain areas, particularly adapting their risk models to the actual risks within particular instruments.

Hobson: We have not had many questions about the choice of CCPs. We have been very heavily focused on other issues. Is that because the clients do not actually have much choice?

Freeman: No. We have had competition in Europe for some time. We were clearing on LCH only because that was the only CCP available in Europe. Now there are a number of CCPs that are available and we definitely see client demand across the spectrum of CCPs. Eurex, ICE Clear, CME Europe have all gone live, and we see clients on those CCPs, and for different reasons. On collateral segregation, this is something that we spend a lot of time talking to clients about. We will have to increase that interaction as we go through the CCP authorisation period in Europe , because at the end of that period we as the clearing broker and the CCPs have to offer both an omnibus level segregation and an asset protection level of segregation. Clients will need to make a choice between those models. I think the choice is based on complex consideration of where that client is on cost, on risk, and operational efficiency, and it is not just a straightforward case of more segregation is better than less. From the segregation perspective, there is a lot more still to come. Clients are much less focused on, for example, the credit rating of their clearing broker and the credit risk to their clearing broker. What we are putting in place are institutional structures that will allow for this collateral segregation and portability in the event of a clearing broker default.

Reucroft: The whole `What does it cost me? Segregation or non-segregation? is the old MF Global issue, because they were offering non-segregation much cheaper, and lots of clients were going for it. In the end it cost them a lot more than they anticipated. But there are different individual segregation models in Europe and new ones emerging all the time, some of them rather peculiar.

Hobson: Peculiar. Is that good peculiar or bad peculiar?

Reucroft: I do not know, to be honest with you. It may be good, it may be bad, but it will be interesting to see if ESMA tick the box and authorise them.

Woodward: I would just like to pick up on Amy's point. One of the requirements for EMIR is on omnibus and individual segregation, and I think it is really important that clients do look at both. If you have been trading and clearing listed business for years, that will have been in a net omnibus account. So there is awareness and knowledge, and I think that is a really important thing. I am not saying that everyone should end up in one or another. I think it is just really important that clients, as they look at those models, actually work through the decision, particularly given that there will always be intermediation by a clearing broker.

Freeman: I think that is completely right and that different clients will have different considerations on that spectrum of cost, risk, and operational efficiency. MF Global is a special case to bring up. In the world of clearing with the authorised CCPs that we have across, that should not be a situation that happens going forward. Even in the omnibus model client collateral is actually segregated from house business. Clients will at least be much more aware of what they are buying into when they undertake their clearing activity.

Reucroft: You have still got fellow customer risk or double default risk, as we call it in Europe, and that is why they introduced the new model to try and eliminate it.

Freeman: In the omnibus model there is still the client mutualisation risk.

Woodward: Again, it is important for the client to understand what those risks are, because there may be a much more cost-effective model. The flip side is that a lot of people are focused very much on asset protection, and quite rightly. But actually then you hear some conversations about what assets they are going to use. Well, it turns out to be cash. This is why it is very difficult to use broad paint brushes over parts of the industry.

Freeman: It is the detail of it that is going to be really important.

Hobson: I had a conversation with a central banker late last week who said, `Well, we are printing all this cash, so why do you not use it as collateral?’ But, Amy, just on this question of counterparty credit risk, how often are your clients raising the issue of the equity capital of central counterparties? Is the question being asked at all about the financial strength of different CCPs? They are seen as part of the infrastructure and therefore riskless, with matched books and all the rest of it. But just on that pure equity capital question, does it ever come up?

Freeman: Honestly speaking, it rarely comes up. I think, when you think about the nature of risk that a CCP is taking by centralising these contracts within the CCP, it is counterparty risk. That counterparty risk is collateralised through the use of initial margin and variation margin, which is passed through the CCP to the in-profit party to the trade. So, from their counterparty risk perspective, the CCP is very well capitalised because they have very risk-sensitive and conservative margin methodologies that they are calling from all counterparties that are clearing through the CCP. In terms of equity capital, really the only risk that is mitigated by it is a form of operational risk. Let us not understate the possibility of that happening, but ultimately if the key risk at the CCP is to manage counterparty risk, and that is collateralised through initial margin, then I am not surprised that the question around equity capital is not one that I face on a frequent basis.

Reucroft: I am quite interested in this. Do you ever get involved with the hypothetical capital of the CCP and the part three capital calculations, because that is basically saying, `Does the CCP have sufficient capital to step into the waterfall if it needs to?’ I think there are probably quite a few CCPs out there where the answer might be, `No.’
Freeman: That is what the Basel III hypothetical capital calculation is trying to capture: the size of the default fund, which is the mutualised pool that all the direct members are putting into the CCP. Then you have to ask how the risk of that to us as a direct member is managed. How is that capitalised on our own balance sheet? Without going into the detail here, the original Basel proposals were coming out with some very very high numbers for capital. Since then, Basel has moved away from that somewhat, and come to a much more sensible outcome. I would just reiterate the point that the CCP really manages its risk through initial margin. You raise a good point around the concentration of the mutualised pool, and as such, the key risk that it is managing is capitalised through those methods. One good example that we always talk to clients about is the case of LCH in the Lehman Brothers default. Lehman had 70,000 interest rate trades cleared at the CCP. That default was managed within the liquidation period, so at that time that was five days at LCH, and LCH returned 65 per cent of the initial margin of Lehman Brothers to the estate of Lehman Brothers. From that perspective, I think you can start to see some of the levels of conservatism that is built into the system.

Hobson: I can see we could go on for a long time, but we should probably wrap this up. I will ask each of you in a minute to tell the fund managers listening what criteria they should use to choose the specialist in your field, whether that is a CCP, a clearing broker, or a trade repository. But before we do that – indeed, while you are thinking about that - could we just wrap up one or two follow-up questions which we have had from listeners. You will remember one of our listeners said he had not seen a middleware offering that can deal 100 per cent with the matching UTI requirements, and how did we propose that managers reporting both ETD and OTC derivatives manage their reporting obligations if one or more of their managed accounts clearing brokers does not sign up to a middleware provider? We suggested that he sack his clearing broker. He has written back saying it is quite difficult to sack the clearing broker if it is the managed account owner’s choice which counterparty to use. He says, `Our understanding is that clearing brokers can report directly to a trade repository which then does not allow the match to happen in the middleware if the investment manager hopes to solve their reporting issue via a third party provider.’ Obviously he cannot sack this limited service clearing broker. Can you help?

Freeman: It is quite a complex question. I agree that, where you have some of these fund structures such as a managed account platform, then actually the underlying manager may have limited choice in the overall selection of who is used as a clearing broker. If this particular client would like to come and talk to us in more detail, then perhaps we can do that off-line on this specific issue.

Hobson: Okay, so let me answer that question for the listener. Amy is very happy to talk to you about it so you get more clarity. Another follow-up question is much simpler, and perhaps you could all just say `Yes’ or `No’ to this. It reads: ` Apologies. It was not clear to me if we have to report also derivatives that are not OTCs. In other words, do we have to report ETDs as well as our swaps?’ What is the answer to that, Tim?

Reucroft: Yes with 70 per cent certainty because we will not know until it comes out on sixth of November but we think the answer is yes.

Hobson: And you agree with that Mark?

Woodward: Yes. I will put something in there in terms of timing, but at some point they will need to be reported. It depends on whether there is a timing question in there.

Hobson: Tom - do you say yes with 70 per cent certainty?

Stewart: Well, yes, with 100 per cent certainty that ETDs will need to be reported. The uncertainty would be the date.

Hobson: It is just a question of timing for you?

Freeman: I agree with what everyone else has just said. [On 7 November, the European Commission announced that both OTC and ET derivatives will have to be reported from 12 February 2014, overturning the ESMA plea for a one year delay in implementing reporting of ETDs.]

Hobson: There is a final question here. It reads: `Do non-European economic area corporate counterparties, for example from Thailand, need to be registered with an EEA CCP when dealing with an EEA financial counterparty?’ I suspect the answer to that is `Yes,’ is it not? So you are a corporate, you are based outside the European Union, and you are in Thailand, do you need to register with a CCP in Europe when you are dealing with a European financial counterparty in Europe?

Freeman: If we were trading with a non-financial counterparty outside of Europe, provided the level of trading was below their clearing threshold, then that trade would not need to be cleared. If the corporate level of trading activity, which was speculative and not hedging and was above the clearing threshold, no matter where they were located, we would expect that trade to be cleared and reported by virtue of the fact that we are based in Europe.

Hobson: What is the threshold Tim, remind me?

Reucroft: By asset class, €1 billion or €3 billion.

Stewart: I think it also needs to be said that you cross one threshold then you have to clear.

Hobson: So between €1 billion and €3 billion? As always, there is no clear answer. But the short answer is that, if you are above the €1-3 billion threshold in whatever asset class it is, if you are above that threshold and you are speculating and not hedging, then you would have to report, and once you had reported once you would have to report all the time.
Stewart: You would report everything but it is a clearing threshold so once you cross one threshold you clear everything in these asset classes.

Hobson: I think perhaps that is a clear answer. Now let us wrap this up by giving some clear advice to everyone listening as to how they should go about choosing a trade repository.

Stewart: First, an asset manager needs to review how it is going to do the reporting. Does it want to delegate or does it wants to report on behalf of the fund? If the answer is delegated, has it actually looked into the actual process of delegating and how simple or complex it may be, and is it aware that the legal obligation could never be removed from themselves? Are they confident, if they delegate to multiple entities, that they will actually do it so that they do not get in trouble at the end of the day? If they decided to go direct to a trade repository, which many managers are now doing, is that the trade repository for all the assets that they are trading? Does it cover everything? Can they do all the reporting to that repository? Does it have a flexible accounts model? Does it allow the enrichment, or at least the viewing, of the information for the underlying counterparty? Is it secure and scalable? Are there links to CCPs? Regis TR, for example, will have links to Eurex, who are looking to accept the reporting and report directly to a trade repository on behalf of other entities. Does it have any ancillary services? Does it have links to platform management systems? Regis TR, for example, is linked to the Clearstream system. Will its cover other compliance obligations such as MiFID and the Capital Requirements Directive (CRD)? Is it future proof and, obviously, is it competitively priced? Another very important thing is whether you can actually review the service now? Regis TR has had a test environment since November last year. We have got 500-plus entities actively testing, uploading their files. It is free of charge to access the test environment.

Hobson: ESMA has opened the possibility, once your swap reporting starts, to report your MIFID trades through your trade repository as well. Is that something every trade repository is doing?

Reucroft: The issue with MIFID was in respect to exchange traded derivatives. The reason why ESMA wanted to delay them was that there would be an inconsistency between EMIR and MiFID because on MIFID it is the executing broker that reports the transaction and under EMIR it is the clearing broker. So obviously there is a difference in who the counterparty is, and whether it is an individual trade or position that they are reporting. Because of the inconsistency between MIFID and EMIR, ESMA wanted to delay the reporting of exchange rate derivatives. The EU turned around and said, `No you cannot.’[On 7 November, the European Commission announced that both OTC and ET derivatives will have to be reported from 12 February 2014, overturning the ESMA plea for a one year delay in implementing reporting of ETDs.]

Nowell: To report your MiFID transactions, you have got to report them to an approved reporting mechanism. So as a TR, we can only accept those if you are an approved reporting mechanism. UnaVista, as well as being a TR applicant, is already an approved reporting mechanism.

Hobson: My question was whether there any synergies there for fund managers?

Nowell: There are certain synergies. Unfortunately, there is a lot still to be decided. Clearly, the reporting scenarios are all-important because, as it has already been said, it is the executing broker under MIFID that needs to report transactions, whereas we believe that it will be the clearing broker who reports under EMIR. So there is quite a big stumbling block there. Also, there must be data standards on all the fields, and we do not know what the UPI is going to be. We do not know how consistent the standards will be between MIFID and EMIR, so there are an awful lot of unanswered questions there. But the idea that we are trying to put forward is that you can send a single set of super-data to a trade repository such as UnaVista, and the trade repository can work out which data needs to go to EMIR reporting and which extra data needs to be there for MIFID reporting. So there is a potential for a one-stop solution there, but unfortunately the two sets of reporting requirements are quite diverse at the moment.

Hobson: What are your two, three or four key points which fund managers need to pay particular attention to when choosing a trade repository?

Nowell: The first one would be a safe pair of hands. Do you have experience in extracting data? We have huge experience of extracting MIFID transaction reporting data. We are building out our EMIR offering from the same platform, so it is just configuration to an existing platform. Agility is all-important. Since we know that ESMA have got to come up with a great deal of clarification on the requirements you need your TR to be agile in responding to those changes. My gut feel is that some of those all-important clarifications will come quite late in the day - you can say end of October is already late in the day – and we could be working into the New Year on those all-important clarifications. Test environments, as has already been said, are a good idea. It is clearly good to have a test environment up and operating, and we also have that in place. The provision of management information is another point. Firms need to have the systems and controls and reporting in the same way they do with MIFID transaction reporting. They need to be able to see the data that has gone through, see exactly where the validation fails, and also see exactly where the data does not match up with the counterparty. We have great experience in sending that data to firms in exemption reports.

Hobson: Mark, what advice can you give our listeners on CCP selection?

Woodward: Tim had a very useful flyer in his slide pack that picked up most of the key points that I think people actually need to look at. I would just add two different points. First, what is the overall service offering? What does it look like? What is it in terms of risk management? What is the product scope? What is the nature of the expertise? All that is particularly important as a general comment. Tim catches things like margin methodology, collateral, and all of those, so that for my money is the overall perspective. But I think each fund manager will have particular issues or particular key areas of concern, so it is then a question of drilling down into exactly what those look like, be it individual segregation, be it asset protection, be it the overall trade workflow, be it which middleware is connected etc. I think it is the overall balance between the service offering and the specialist requirements of each particular client that matters. Last but not least, there is clearly a legal analysis that needs to be undertaken. The core part of that, on top of looking at the CCP rules and how they interact with clearing members, is clearly the interaction with solvency law in the jurisdiction where the fund manager is based. Because for fund managers generally, it is the interaction between those two that is important.

Hobson: Amy is going to tell us how how you should go about choosing a clearing broker, but you are not allowed to say, `Just pick Morgan Stanley.’

Freeman: Just pick Morgan Stanley! What I would say is that the first thing, as we said right at the beginning, is to move sooner rather than later. There is a lot to be done here and I think clients needs to put themselves in the best position by moving soon. Alongside that, unfortunately, is an incredibly complex set of decisions that clients need to make, be it the collateral segregation model, be it the legal arrangements, be it the CCPs that they choose. So really moving sooner and partnering with a clearing broker organisation that can help you through that complexity is a really important element of the decision. The last couple of things that I would mention are from a platform or a build perspective. As a clearing broker operating on multiple CCPs in multiple jurisdictions, with multiple segregation models, and with a technology provision to our clients, it is a huge build. It is complex and it is expensive to do. As such, you really want to be working with a broker that is committed to the business and which will build something that is robust and sustainable. Ultimately, you do not want to have your trades not clear, or run into problems from an operational risk perspective. One of the last things I would say is about risk. Ultimately, what clearing is trying to do is centralise risk within the system, within very stable and robust organisations. As such, when clients are considering the risk terms that they enter into with their clearing broker, and the risk of the system overall, it is better to be conservative and to still be here in 20 years’ time. 

Hobson: It is not too late? You still have some capacity left, right?

Freeman: That is right.

Hobson: Now, Tim, you have talked quite a lot about the risks associated with entering into a cleared environment. Not just with your clearing brokers but with the CCPs themselves. Are the regulators making a terrible mistake here?

Reucroft: No. I think the overall thrust of all this is right. I think some of the details are badly wrong. But I am sure that we will all get sorted out in the wash eventually. In the meantime we are all going to have to go through quite a lot of pain and a certain amount of expense before it all gets right. But are we moving in the right direction? Definitely yes.