How to Choose a Trade Repository Webinar
Both the Dodd Frank Act and the European Market Infrastructure Regulation (EMIR) oblige swap counterparties to report details of trades to a trade repository from 12 February 2014.  repositories are now at various stages of development. To help members of COO Connect work out how best to comply, founder Dominic Hobson moderated a conversation between Damien Gillespie, Head of Europe and Americas sales for core products at Clearstream, a 50 per cent shareholder in REGIS-TR, the Luxembourg-based joint venture between Clearstream and the Spanish central securities depository Iberclear; Daniel Jude, director of client development and sales for asset managers at CME Group, whose CFTC-approved trade repository aims to collect data on credit, rates, commodities and FX swaps; Stewart Macbeth, president and CEO of DTCC Derivatives Repository Limited in London; David Nowell, head of industry relations and regulatory compliance at UnaVista, a division of the London Stock Exchange Group; and Janet Wynn, director of business development for North America at Thomas Murray IDS, and a former managing director at the DTCC, where she helped to build both Deriv/SERV and the CDS trade repository.
Hobson: Could each of you please describe the current status of your own repository, and your long term ambitions for it?
Gillespie: We were first formed at the end of 2010, so Regis TR has actually been around for nearly three years, which is longer than some of the other players in the market. We had a full test system available by the end of 2012, across all derivative asset classes. We are still in the testing phase. To go live, we have to be approved by the European Securities and Markets Authority (ESMA), but we presently plan to switch on the live system one month before the go-live data of February 2014. So we feel we are pretty experienced in terms of our product knowledge and our relations with ESMA. The short term goals are to provide clients with flexible reporting options for those who want to deal with us directly, and for those who want to deal with us through third party systems. In the last few months, clients have really started to look under the bonnet, to understand the details of what we can provide, and client reporting is a very hot topic in terms of how they can report, how clearing brokers can report on behalf of their clients, how clients can view the underlying data, and how they can partially or wholly delegate reporting. These are the issues which are most important to clients in the short term, by which I mean between now and February next year. From a long term perspective, Clearstream and Iberclear see Regis TR as a reporting hub. We would like to develop reporting solutions not just across EMIR, but across CRD 4, MiFID 2 and other regulations coming down the pipe. We are looking at developing partnerships with a number of third party organisations, such as SWIFT, KAS Bank, the National Settlement Depository (NSD) in Russia and IT vendor Abide Financial, which is providing a MiFID 2 reporting capability. We want to provide a one stop shop in terms of reporting solutions across the various regulations. In the very long term, we are interested in what value-added services the repository can offer to clients, such as collateral management.
Nowell: In the short term, our goal is to do an excellent job in terms of EMIR reporting. To do that, we are building on our existing skills as an approved MiFID reporting mechanism. In other words, we are already reporting under MiFID. Beyond EMIR, we will be client-driven. We will see if there is a business case for expanding internationally, or for acting as a routing agency for other trade repositories outside the European Economic Area (EEA). We have already got REMIT on our horizon. We are talking to the Agency for the Cooperation of Energy Regulators (ACER) at the moment, and we hope to be a registered reporting mechanism for ACER as well. Like Regis TR, we want to be a one stop shop for regulatory reporting, so we are looking at servicing all the regulations, and especially looking at where we can re-use the same set of data to meet multiple regulatory requirements.
Jude: In the short term, you have to balance the tactical against the strategic. Tactically, we want to make sure clients are ready for reporting on 12 February 2014. We are live in the US, and in Europe we are in the testing phase, and hope to go live with the testing platform at the end of this week [5 October 2013], and to go live with clients on the platform by the end of the year. We are supporting all five asset classes – commodities, equities, rates, credit and FX – and we want to make sure clients are aware of the implications and the different product silos and execution flows for OTC bi-lateral, OTC cleared and exchange traded. Exchange traded has just come back into play, so there is an educational job to be done in educating clients about what their obligation is in that area too. These are complicated matters for clients, and it is taking up a lot of their resources in the short term. Longer term, CME has exchanges and clearing houses as well as trade repositories, so we want our repository services to become a systemically important part of the infrastructure in the same way as our exchanges and clearing houses already are. We want to be there for clients for execution, clearing and reporting, to create a single trade flow.
MacBeth: In the short term, we are focused on helping people with compliance obligations, and in particular the G20 reporting mandates across various jurisdictions. Our long term strategy is to create an open access infrastructure that holds this particular set of trade data, and so provides greater connection and efficiency in the OTC derivatives marketplace. Our sponsors are looking to us to provide operational cost efficiencies, and ways of reducing the collateral they have to post against their exposures. A lot of banks are looking at their balance sheet and capital costs, and asking whether greater efficiencies can be driven off this data set. In other words, we are not emphasising reporting in the same way as others, but looking instead to provide an efficient operational infrastructure.
Hobson: Do the repositories coming at this issue from a central securities depository perspective (such as DTCC and Regis TR) have an edge over those coming at it from an exchange perspective (such as CME and Una Vista)?
Wynn: There is certainly a wealth of choice, and not just in terms of the number of repositories. There are repositories that make reporting the centre of the universe, others that emphasise operational efficiency, and others that emphasise the provision of a vertical that runs from trading, through clearing, to reporting. It is challenging for the marketplace to decide which of these styles works for them. I wonder what percentage of financial counterparties are actually ready for reporting at this point.
Jude: A very good question. You have to remember that there are non-financial, as well as financial, counterparties that are impacted by this regulation. That is an important distinction between the European regulation and the American regulation. Are our clients ready? Some of them are. Some of them are looking at the tactical fix and the strategic fix as well. Some clients are looking just to get reporting in place to meet the February deadline. Some are looking at completely changing their internal operating systems. We also have clients who say they are looking to delegate the reporting, but are finding that in certain asset classes– such as FX – it is difficult to delegate, and are having to develop an element of self-reporting. There is a lot of confusion in the market, and what is right for one client is not right for another.
Gillespie: Among our clients, everyone is moving at a different pace. There is no doubt the banks are the most advanced in terms of having reporting requirements ready for ESMA, though a lot were sitting on the fence in terms of whether they will report on behalf of clients or report only their own data. That remains a big question. We have done a lot of work with the banks, the corporates and the technology companies and the exchanges that want to connect to the trade repositories. A lot of the larger corporates and asset managers are slightly behind the banks, for obvious reasons. The fact that the start date of the regulation has been delayed on a number of occasions has not helped us as trade repositories, because it creates a lot of inertia about whether to start testing or not. We had the system ready at the end of 2012, and we currently have over 600 clients registered on our test site.
Nowell: We have clients live in testing now. There is a User Acceptance Testing (UAT) environment and it is all going well. `Are they ready for reporting?’ is a strange question, because nobody knows truly what they have to report. The standards are not published and, when it comes to exchange traded derivatives, nobody knows which counterparties actually have to report to a trade repository. So it is really difficult to say whether firms are ready for reporting until they know exactly what they have to report. The same applies to the data standards. What data elements do they have to report? Where do they get the Unique Public Identifiers (UPI)? What will be the standards for the UPIs? It is really difficult to be ready. Some of the banks are in an excellent position. On the buy-side, some firms are on top of the issue, and know exactly what they need to do. Other firms may be in a state of denial to a certain extent. There is a belief that the sell-side clearing brokers are going to do it all for them and that they will be able to delegate the reporting to them. A lot of banks are indeed asking us about delegated reporting solutions, but not too many are committing to it, so it leaves the buy-side in a difficult position. Can they rely on the brokers or do they have to do it themselves?
Hobson: Most clearing brokers I talk to say there is no chance of them doing the trade repository reporting on behalf of fund managers. Is anybody expecting the clearing broker to do it for them making a mistake?
MacBeth: There is definitely work for people to do if they are to be ready on time. We are seeing more now in terms of dedicated reporting from the top tier financial institutions. We saw quite a lot from second and third tier fairly early, particularly on behalf of their corporate customer base, where they were committed to support their customers from an early stage. We are now starting to see some of the largest firms look at this more seriously. It has been an evolutionary process, in which they had to get to a position in which they felt they were on top of their own reporting. They knew there would be errors in their own reporting, so streaming that service to a customer was difficult. The sell-side tend to segment their customer base between multi-bank and single bank customers, and differentiate the potential offering accordingly, because they know they can do more for the single bank clients than the multi-bank ones. They recognise that, where a customer is multi-banked, they are going to have to have access multiple trade repositories to check across all the clearing brokers, and that makes it difficult to achieve any consistency in their offering. So it is right to characterise clients as being at different stages of development, and the reporting requirements and standards being unsettled, but the delay has allowed time for more thought to go into the delegated reporting offerings than was originally available.
Hobson: Is it an option for a fund manager to choose a single trade repository and still cover all asset classes and all geographies?
Jude: Yes, they can. For us, that is a long term goal. We will connect our trade repository up to other exchanges, and other clearing houses, as led by client demand. In theory, we could connect to all 85 CCPs in the world, if the demand was there and the regulations permit it, because we have to stay within the confines of the regulation. Once the equivalence and extra-territoriality rules from ESMA are a bit clearer, I see no reason why we should not connect to all the CCPs. But we are talking long term. You are not going to find clients connecting to multiple trade repositories or clearing houses or multiple clearing brokers immediately, because of the limited resources they have, and the timescales they face. At the moment we are obviously connected to one CCP. But in my view all repositories will be connecting up in all the jurisdictions where there is client demand.
Gillespie: We have done testing with three CCPs: Eurex, MEFF and OMX. So two are inside the Regis TR group, and one outside it. EMIR coverage is obviously our top priority, but we do have a joint venture with the NSD in Russia, which enables Regis TR to pass on data to the Russian regulators. That goes live in October. Like CME, we are looking at client demand, to work out where clients want to report. On the exchange side, some exchanges are looking to be agnostic, and offer trade reporting to the repository of the client’s choice. Other exchanges are looking to create a closed single stop shop.
Nowell: The CCPs we are connected or aiming to connect to are within the London Stock Exchange Group – LCH.Clearnet and CC&G - but we are not limiting ourselves to that. We are talking to a number of CCPs, and hope to win them both as customers. If our clients want them to report certain elements on their behalf, we will support that.
MacBeth: There is an interesting pattern to this, in which links are to affiliated or associated entities. Any CCP that does not have an affiliated repository seems to be reluctant to send trades to a trade repository that does. That is the nature of the current market dynamics. Some of the CCPs, in terms of their trade repository offerings, are focused on the asset classes they are clearing. CME would not support equities in the US, and ICE Clear would not support rates. At DTCC, our US trade repository is already linked to Eurex, the Japan Securities Clearing Corporation (JSCC), LCH.Clearnet as Clearnet only in France, and to LCH in the US. The EMIR trade repository is not yet live, so it is a matter of testing and discussions with a series of European clearing houses, and some outside Europe as well.
Wynn: If the purpose of trade repositories is to reduce systemic risk, I have to ask whether specialisation by asset class might work better, but it does not sound like that is the direction the industry is going.
Hobson: Good point. Is there anything the four of you are not doing? Is there any asset class you are specifically excluding?
MacBeth: No. There are certain jurisdictions we are not going after but, in general, the cross-asset reporting obligation across multiple jurisdictions has been our target market, and we are trying to offer a single point of connectivity to fulfil multiple reporting obligations.
Hobson: Nodding heads suggest the others agree that they are leaving nothing out as well, so everybody is planning an all-singing, all-dancing trade repository service. Yet ESMA has set an aggressive Big Bang date for reporting to start. Will you be ready or are you taking on too much?
Jude: It is more a question of whether the market is ready, as opposed to our view on it. Obviously, we are between a rock and a hard place. We have the regulations stipulating that this is the way we have to go, with five asset classes, and that it will be a Big Bang approach, and we will build an offering that is compliant with those regulations. But from a client perspective, is that necessarily the best way forward? Exchange traded is now being squashed in too. Has that impacted clients? Yes, it has. But there is a lot of other regulation going on beyond the EMIR reporting mandate that is impacting our clients, and they have to cope with that too. We have to take account of the fact they have a lot of other things to do.
Hobson: How are you going to manage the delivery of data to regulators? Are you going to push it to them or are they going to pull it off your systems?
Gillespie: We have looked at the CPSS-IOSCO standards to establish how we are supposed to report to the regulators, and we have had dialogue with a number of regulators throughout Europe. It will be a push and pull, and we are building our repository to be able to do either. Our preferred option is for us to push reports to the regulators at the end of every day. The reason for that is that, if you have got a central bank or a regulator coming in and doing queries on all sorts of transactions within your database, that may impact on performance. I think anyone with a database will tell you it is more efficient to push reports on a scheduled basis to the regulators.
Hobson: Is the DTCC model a Push me-Pull you as well?
MacBeth: We do both in practice already so, in the case of the user interface, I think the standard will be fairly consistent across the board. Regulators can log on like a client would and pull down reports or run searches in the database over entities or date ranges - whatever they want to look at.
Hobson: So all of you are offering regulators a choice: they can pull it off of your systems or you can push it to them if they want the data that way. Can you give us a sense of whether you are getting the consistency of requests from regulators that would help eliminate uncertainty?
Nowell: We are not there yet, so we have not had requests for any data so far from the regulators. All we are trying to do is make sure we are in a position where we can offer multiple solutions, to be a flexible as we can – not just push or pull, but as flexible and web-intuitive an interface as we can develop.
Hobson: What sort of schedules are regulators demanding? Is regulatory reporting going to be real-time or daily, weekly or hourly? After all, if the ambition is to reduce systemic risk, seeing data two months after the fact is not going to help the regulators, is it?
Nowell: Firms have an obligation to get the data to the regulator for EMIR on a T+1 basis, so we will be allowing the regulators to access the data on T+1, whenever they want.
Hobson: Are regulators expecting repositories to alert them to systemic risk?
MacBeth: There is certainly some demand. We have not ever implemented any but they have talked to us about triggers as being potentially the sort of thing they would want. Typically, the stuff we have done has been reports of information chain positions, as opposed to anything that is threshold-based and, if that was exceeded, there would be an explicit notification. But we have certainly heard interest in that directly from regulators.
Jude: The regulators have not asked us yet because we are not live. But one of the important things we are seeing is that, once we do go live, regulators will be looking at our information in regards to clearing products. It will disclose huge amounts of information as to where the concentration risk is with clients and counterparties, by looking at where the vast majority of trades are being cleared they will actually obtain some transparency in these markets. So there will be use of the data by regulators, but at the moment they are looking at it as a means of understanding what is going on in the marketplace so we do not have a repeat of the 2007-08 fiasco.
Hobson: In terms of getting the data into your systems, it is obviously helpful to hook up to trade confirmations systems and third party suppliers. Who are you hooked up to or planning to hook up to?
Jude: At the moment we are in conversations with the vast majority of the names everybody knows, and which most of the clients are using already. Unfortunately, under non-disclosure agreements we are not allowed to disclose who they are. But they are the main affirmation/confirmation platforms across asset classes and we are in discussion with all of them.
Hobson: DTCC operates one of the leading trade confirmation/affirmation networks. What are you doing to repositories and market participants?
MacBeth: We have a lot of connectivity to a lot of vendors, so we have this construct, which we call a third party provider. They can interact directly with us. We have over 50 connected and they range from custodians and fund administrators through to confirmation middleware providers and risk management software vendors. There are also some stand-alone agents that specialise in the space. Across all of those client types, about 65 organisations are working with us at the moment.
Hobson: There is obviously going to be multiple trade repositories in Europe. What is the scope for you working together, and what might be the advantage of that to a fund manager if you did?
MacBeth: We do not know where everybody is going to become go-live, certainly in Europe. We are trying to work through an application process. The area that we have been working together on has been the inter-trade repository reconciliation requirement in Europe, which is one of the factors in our application. Part of the regulation that falls on us is being able to reconcile between repositories, and we have been working on that. We suspect that there will be some effort to standardise data, so that we can work together. In terms of looking at the market as a whole, we are trying to compete with each other, to offer our services, and explain the relative benefits of our service against our competition.
Hobson: How many trade repositories can the European market support? If there is going to be consolidation, how many do you think the market will need or have in three years’ time?
Wynn: It does not strike me as a very high margin business so I am wondering. I do think there are differences in the asset classes and there will be a tendency for the exchange traded to gravitate to where they are traded. But I wonder how many value added services can be added to the basic reporting to make it profitable.
Hobson: Are you saying exchange-based repositories are at a competitive advantage when it comes to consolidation?
Wynn: I do not think it is an intrinsic advantage. It gives you some clients when you start out. But people I have talked to seem to accept that they are going to have multiple trade repositories even though every repository offers one-stop shopping. That is because, given the way their own operations are set up, it could be easier to have futures go to one repository and OTC derivatives to another.
Hobson: If this is not a high margin business, and ESMA has certainly taken the view that it does not want this to be a high margin business, what is your charging structure? How do you expect this to be a paying proposition?
Gillespie: ESMA obviously monitor the trade repositories very closely. Ours is a cost-plus model. It is in the value added services that we are looking to position the repository in the long term. We believe that we have a unique advantage thanks to the collateral management engine that Clearstream has developed. As swaps move from OTC to on-exchange, there will be a requirement to post collateral. We are planning to link the trade repository into the Clearstream collateral management engine. Clients are asking us to do this. The new regulations around Basel III and balance sheet efficiencies are really important in terms of the cost of capital, so if you can tie the reporting into an automated structure and post collateral to the CCPs on an automated basis that is hugely important. There is a charging structure for reporting services. But clients need to look beyond that and see what else they are actually getting. The smarter players in the market are looking beyond reporting to where they can get efficiencies. We are also the only trade repository to have linked with SWIFT. So, if clients are doing MT300 FX messages on SWIFT, SWIFT can copy those messages and send them to us. Again, by tapping into the existing architecture of a big provider like SWIFT will make it easier for clients to report. There are a number of things that everybody needs to look at around liquidity and balance sheet efficiencies. You have to explore where you can get economies of scale right across your group, not just in the trade reporting piece.
Hobson: Lightly editorialising that answer, are trade repositories a loss leader for you too?
Nowell: As a trade repository, we will not be operating as a loss leader. We are going to treat our trade depositary as a stand-alone business. We will have to cover our costs, so our charges will be cost plus.
Jude: Janet brought up a good point about asset classes and execution methods. Clients are sometimes driven by certain asset classes. We may over time see certain trade depositaries that have both an exchange and a clearing house in the same group come out in front. But, in the interests of being fair, whether integrated providers are the strongest contenders will depend on the client. The other question is margins. The regulatory mandate is cost-plus basis, so this is not a licence to print money. All repositories have taken that on board and are making sure the pricing covers costs. We also have to pay ESMA for their supervisory functions, which is why there is an additional charge. How can you offer something for free if you are going to have to pay for these supervisory functions? Then we will also have to charge for providing ancillary services too. Collateral management is one of those.
Hobson: Have you shared a pricing schedule with ESMA, and did they like it?
Jude: Yes. And they liked some aspects of it. On other aspects, they have asked for feedback. One of them is fee holidays. These are not something that ESMA is allowing us offer, so we are having revise our thinking. Another is the pricing of ancillary services.
Macbeth: ESMA have asked some questions and we have responded to the questions. We are not giving too much more than that as this stage.
Hobson: When will these fee negotiations with ESMA end?
Nowell: Hopefully, sometime before 7 November, which is the approval date.
Hobson: A listener would like to know: What is your start of readiness for reporting listed derivatives?
MacBeth: People have a got a lot of issues in terms of interpreting the standards that are written and turning them into reports. Some of the issues are fairly fundamental, because the reporting requirements start at the execution level of the contract, yet the reporting applies to counter-parties while a lot of the execution is actually done by executing brokers or agents. Agents do not hold principal positions. So there has been a certain amount of confusion about the point at which to report. Then, when you get into the detailed elements of a transaction, there is a set of questions about exactly what should be reported. Even things like the trade identifiers are slightly tricky because, if trade identifiers are described at the execution level and the counter-parties to the transaction are modified at the clearing level, most people will view the transaction as separate elements: one being a trade between the central counter party and the clearing broker and the other a set of contracts between the clearing broker and the end-client. The CCP and the exchange have no visibility over that set of client contracts. So there has been a certain amount of uncertainty. The Futures and Options Association (FOA) have championed some suggested solutions, and clarified some, and taken their recommendations to ESMA. But how do they get changes confirmed? The ESMA process to actually approve something like that is prolonged. As a practical matter, it is difficult for ESMA to endorse a single suggestion.
Hobson: So at the moment we are still stuck in the previous world in which clearing brokers are reporting trades to regulators on behalf of their buy-side clients but nobody has worked out yet how this will be integrated into the new system of reporting swaps. Is that what you are saying?
MacBeth: In part, except there is a very clear obligation on the end-client to fulfil a reporting obligation.
Nowell: It is still a very confused situation. But when there is an electronic platform - whether that be a SEF or an OTF, or an affirmation or confirmation platform - that connects up the parties to a trade it actually becomes relatively simple to report. A lot of clients do ask us about the changing data elements at the execution level and the clearing side, but you do at least have a process flow in place. My concern is more about the bi-lateral trades that are out there. You do have electronic systems, but they are give-up systems, not affirmation or confirmation systems. So the biggest investment of time clients will have to make will be on these bi-lateral trades that are sitting on their books and which they need to report. That is where self-reporting comes in. You can say to your clearing or executing broker that they need to report a trade for you, but not every execution or clearing broker is going to do it, or accepting that obligation or delegation. Therefore, you are removing a lot of the clearing and execution brokers you can actually trade with today. So a lot of clients are saying to use that, if there is only a handful of brokers that are going to do it for us, that is the avenue they are going to go down when they need to self-report. Everyone is pointing fingers at the clearing brokers, and it might be odd for someone to be defending them, but this is not a business in which they have reporting obligations of their own. They are not building systems of their own to meet a reporting obligation they do not have.
Gillespie: Look at the corporate treasurers, for example. If they are doing inter-company transactions, they have an obligation to report, but their transactions will not be seen by the exchange or the clearing brokers. They are coming directly into the trade repository. It is a real challenge for end-investors. End-investors are paying a lot of peoples’ salaries so you do not want to have regulation that is so tight it imposes a huge cost on them. Some of the general clearing members are coming to us asking how they can report these trades because they are afraid to lose the business. The other big challenge is that clients are going to back-load transactions from the 12 Aug 2013. How do they do that? How do they ramp up that data? How do they pre-populate the unique trade identifiers? Clients have got to go and get legal entity identifiers (LEIs) from registration organisations in every country. That is a big challenge. As a trade repository, we normally feed them LEIs through our system, cross-checking to make sure they are actually valid. So there are lots and lots of challenges in terms of the timing, and in terms of what the client needs to do before the February 2014 start date.
Hobson: Are trade repository charges scalable? Can you service fund managers with few reportable trades – maybe less than 100 to 200 a year – at a keen price? Is that the sort of business you want?
Nowell: We will not turn away business. So, yes, the charges will inevitably be scalable.
Gillespie: For us, it is basically the same charge per transaction regardless of the volume. We have a monthly fee for the actual software, and then we have a transaction fee for OTC and exchange-traded so, the more transactions you do, the more you pay. However, we do have a fee cap for individual companies. If you are a very big user, with over 5 million transactions per annum, then the fees do reduce. If you are in exchange-traded, for example, and doing millions and millions of transactions then there is more of a nominal fee. We are very transparent on the pricing. We share that information with any client that asks for it.
Nowell: I would not want to go into too many details of that while our application is still with ESMA. But, from our perspective, we are looking at a low flat fee - a transaction fee, not a monthly maintenance fee but a transaction fee. Our application is with ESMA at the moment, but we are looking at flat fee irrespective of whether it is OTC or exchanger-traded. If you are doing 100-200 trades a year, it is too small scale, so you also have to look at the number of clients who are out there. We are potentially looking at 100,000 entities in Europe that are looking to come on-board with a trade repository. So there is going to be a big bottleneck if the major clients and the smaller clients come at one time to all of us trying to get connected. As with everything, it is sometimes good to wait. When you are doing only 100-200 trades, you have to be realistic in regards to where you will be in the priority list of clients. That said, there are probably clients out there who are not even aware of the requirements, and that is a big worry as well.
MacBeth: We have a subscription fee in our structure right now. For low volume there would not be any further fees. There is a kind of small limit subscription that would cover that sort of case.
Hobson: Is there scope for aggregators to operate with the clients at the smaller end of the scale and offer effective pricing for an outsourced service?
Jude: Some fund administrators are looking at doing that. We will probably be sticking to the affirmation platforms, because they are pretty much aggregators for us anyway. We are talking of thousands of clients. They are aggregating them for us and then reporting them to us. As we move into the world of electronic platforms and execution, the pain and the suffering should hopefully go away.
Hobson: So, with too many clients and a tight timescale, there is the prospect of a bottleneck. If you are inevitably going to focus on high volume clients, what is your advice to the manager doing 100-200 trades?
MacBeth: It is all about pairing as early as they can. It is not impossible to do it relatively late because there is minimal effort when on-boarding over the Internet. Then, the minimum level of reporting can be done over the Internet. Most of the companies here will receive a file over the Internet fairly easily. So it is not that hard to finalise your connection to a trade repository. The difficult question is more about sourcing the data and making sure you can report it.
Wynn: I do not believe ESMA have thought through completely the implications of having 100,000 “reporters,” and what kind of infrastructure it takes to support them, even if they come in over the Internet. You have to have some customer service in place.
Hobson: If there are tens of thousands of potential reporters, half a dozen repositories and five or six asset classes, the scale of the task could get out of hand. Can you manage the sheer quantity of data coming in?
Jude: This goes back to the question of whether there should be as many trade repositories as there are, and how many we foresee surviving into the future. OTC derivatives are a $600 trillion market, so there is a lot of potential and a lot of volume out there. That is why ESMA wanted to have a number of trade repositories. Scalability is obviously important, but I do not think it will be a problem. As Janet suggests, there will be a level of client interaction, so customer support is a factor that ought to be taken into consideration by managers when choosing a trade repository. It is a complicated matter because the first one you choose is the one you are going to stay with for the long term. Once you connect up, there may not be that much flexibility to move between trade repositories.
Nowell: I do not think we will get 100,000 entities reporting independently when it comes to funds, although the obligation is on the funds as counterparties to report. Fund managers, especially those used to reporting under MiFID, will report on behalf of their funds without too much difficulty. So it is a large number, but I do not think it is a scarily large number.
Hobson: What are the penalties for firms that do not make the February deadline? What is going to happen if you don't make the deadline?
Jude: If we look at the precedent set by the Dodd Frank deadline for mandatory clearing, something like 50 per cent of clients missed mandatory clearing category 2. Despite that, no one has been fined yet. There will be some outliers that do not meet the deadline. But I would not advise it. What a compliance officer is going to say, “We will not meet the deadline, let us hope no one else does either, and we will not get into trouble.” There may be some outliers who choose not to meet the mandate, but I think you will find more clients that are going to be hard pushed to meet it.
MacBeth: I honestly do not know what will happen to those who miss the deadline. You will not get a regulator telling you that nothing will happen, so I certainly cannot underwrite a position on that. I think national regulators throughout Europe will take a slightly different position. Certainly, if you talk to them now, they will tell you their stance is unyielding. I have spoken to a number who feel the message has to be compliance with the mandate, and it is difficult to foresee them backing away from that. I am not sure that heavy enforcement will follow non-compliance, immediately. But in reality some sort of follow-up by the regulator would ensue if it became clear that there was an oversight in terms of their reporting. But it is very difficult to say definitively what will or will not happen if you fail to comply.
Nowell: It is a question for the regulators rather than the trade depositories. The national competent authorities have an obligation to ESMA to make sure that their firms comply but, as to exactly what they do, I am afraid that is a matter for the regulators.
Hobson: How easy are you going to make it for fund managers to hook up to your repository?
Nowell: Exceptionally easy. At UnaVista we are building our links off an existing platform we developed for MiFID reporting. One of the things that we do exceptionally well is make information available to the clients so that they can see exactly what they have entered and exactly where their errors are. They can slice and dice the information by product type and counterparty, so the compliance officer has all the information he or she needs. Many of our clients already receive from us MiFID reporting information, because we have a solution to support our business as an approved reporting mechanism for MiFID. We handle around a billion trades a year for various clients. We have over 600 clients in the UK. The clients see the information they need. If they make errors, we send the exceptions back to them immediately, so they can see exactly what they have sent and exactly what the errors are, and how many there are.
Gillespie: Hooking up to Regis TR is very simple. In fact, we have got the test system up and running already. The client who wants access to the test system can gain access within 24 hours. They can simply send me an e-mail, or e-mail the Regis TR operations. We ask them to fill out a single form, and that gives them access to all of the data, the technical specifications, the web portal and the reporting portal. In terms of actual sign-up, we have two contracts. One is for clients who want to report directly to us. The other is for a client who wants to report to a third party, i.e. they can be a third party reporter on behalf of underlying clients. The question I always get asked is, “What if a bank or one of the platforms reports on my behalf? How can I then get access to that data?” We do offer a view-only option to end-clients. They can log into the web portal and view the transactions that have been reported on their behalf. Something that has come up with FX clients in particularly over the last couple of months is the need for a partial delegation option. In that case, the bank executing the FX trade will report most of the common data, but the private data pertaining to the hedging or speculative purpose will be reported by the end-client, though they can delegate that to another third party as well. So it is very flexible and easy to sign up with Regis TR.
Hobson: What guarantees can you offer managers a sensitive or confidential data will not be disclosed?
Gillespie: We provide them with all the technical specifications around the security when we set up the links. It is very simple to test. Delegated reporting is subject to the security controls we set on the database we provide to give clients information. Clearstream and Iberclear have been in the secure data management business for 40 years, running data centres with encryption devices and security around the data. So we feel that we are very well equipped in terms of security questions, and are happy to provide clients with more information.
Jude: Our security measures are very simple. The GUI is set up by going on-line or sending us an email. There two legal documents, one for the end-user and one for organisations to which clients have delegated responsibility. Though we run five exchanges and two clearing houses, we are aiming to offer a single report to our clients so they can access CME in whatever way they want, and the data will automatically flow through. We as operators can access data in real-time, so as soon as the mandate says reports must be received on T+1, the trade will be on the system, and the client can go in and access the data as well. We have been asked questions about access by the regulators. We have to make sure we adhere to the mandatory requirements, but also that we are checking which regulators are requesting access, and what type of data they are accessing. So security is very important.
MacBeth: Some people have dedicated connections with the DTCC already, so they can use those to connect to the repository. There are a couple of other ways in as well. Which people choose depends on where they are to start with, what is most easily available to them, and how sophisticated an offering they want. CSV files or flat files are a basic format for reporting. Again, there are different levels of sophistication in terms of the actual message format involved, but there are message standards required. Not everyone is using FpML in its entirety, but the minimum level is fairly common across the repository providers.
Hobson: Given everything we have heard, on what basis would you propose that fund managers listening to this webinar should make their decision about the trade depository they use? What are the key considerations beyond simplicity and ease of use? What are the really important things to think about?
Jude: From my perspective, it is coverage of the asset classes. All repositories are covering the same asset classes, but users need to look across OTC and exchange-traded, and at clearing arrangements as well. Another key point is pricing, but that should not be the be-all and end-all, because you need to look at the client support and the experience of the provider. At CME, we are leveraging the experience of the people at our swap data repository in the US. We are learning from their experience and using it to assist our clients here. So experience matters a lot. Client support and aftercare are also crucial. You can fill out forms on-line and it will look perfect, but there will be requirements that can only be met by speaking to somebody who has the right level of knowledge. Education is huge as well. I think the clients will be looking to trade repositories to educate them – to tell them what the requirements are, what is coming up next, and what they should be focusing their time and efforts on.
Hobson: What is the differentiator of your offering? If you were to single out a particular characteristic of what CME IS offering to the market place, what would it be?
Jude: The fact that it is the CME Group. These clients know us – the exchange, and the clearing houses. We are in the US and the UK. We want to have a bigger presence in Europe, so we are in this not to make a huge profit, but because we want to be part of the infrastructure for years to come. Just as we are setting up clearing, we are also setting up OTFs and clearing houses as well.
Hobson: But you are profit seeking company.
Jude: Of course, but there are different avenues and different classes of the business that are highly profitable over others.
MacBeth: We are only in this business because we have got a lot of support from our customer base. We believe we are fulfilling a horizontal role that is going to open efficiencies to the market. We are going to come in with scale economies to start with and a highly robust and resilient offering that is going to be available for customers to see and use immediately. Our corporate structure means that we are in it for the long term. We are not going to cherry-pick markets. We have gone into markets throughout the world, and we have always been cross-asset class in our offerings. So we are totally committed to the market place. We also think we are highly secure. We have a track record. We have also done this before, with the credit warehouse we built many years ago, and we are building from there.
Nowell: Integrity and flexibility are at the top of our list. I am not sure if flexibility has been mentioned yet. By flexibility, I mean the configuration of an existing system. Our platform has been in existence for a long time. When there is a change to the requirements, and we think there will be quite a lot of changes to the requirements – clearly, not all the requirements are known yet, and ESMA has got to go an awfully long way in a short space of time – the ability to clarify them and react to them is something we believe we do well. We think we have got a flexible and agile platform. But of all the advantages we have to offer, I would say a safe, reliable set of hands is the most important. We have shown that we have got a robust, secure system. I mentioned that we handle a billion transactions a year already, so we are also used to high volumes.
Gillespie: With five to six months to go, you have got to be able to do things quickly. That means having a simple system, with easy file formats that offer a robust solution. The market is very clear that it wants flexibility around reporting options, so that they can wholly or partially delegate reporting to a third party. The on-boarding of consultancy services is important too. When you start a dialogue with your trade repository, how easy it is to get someone on the phone, talk through the formats, and form relationships with a local management team will count for a lot. From the Clearstream perspective, local client service is something we are very proud of. We have local service hubs in Frankfurt, Luxemburg and London. Whether you are a small, medium-sized or large client, you will want ta high level of service, and that is something we pride ourselves on.
Hobson: So there we have it. Managers choosing repositories must consider asset class coverage, exchange-traded as well as OTC, pricing, scalability through a robust, high-volume platform, client service, ease of on-boarding and in using the technology. That are a lot of factors. Can fund managers reduce that list to two or three crucial considerations that should drive the decision?
Wynn: I am asked this question repeatedly. In answering, I have gone through what appear to be the strengths of the different repositories, but I also ask fund managers this question: “ Who are your primary counter parties?” Single bank corporates have a different perspective from a fund manager with multiple counterparties. The decision also depends on what asset classes and currencies you are trading. I am very sceptical about the ability to reconcile across trade repositories. So I think a good decision-making process requires managers to go to the repositories that they believe their counterparties are going to be active in. That way, there is a lot less chance of confusion.
Hobson: That is a slightly different perspective. In other words, look at who you are doing business with, check where they are reporting, and try and report at the same place, because reconciliation across depositaries will be difficult. Is Janet right to be sceptical about the ability of trade repositories to work together efficiently?
Gillespie: Trade repositories are going to be inter-connected. That is a goal set by ESMA. So clients will be able to aggregate, view data and report data across multiple repositories. On the reconciliation side alone, we and other trade repositories are looking at how to do it. We are partnering with TriOptima to provide portfolio reconciliation of trade repository data, and offering it as a free service that sits on top of our trade repository. So, absolutely, there is work to be done on reconciliation. But in the long term that should not be an issue. Inter-connectivity is what ESMA wants us to do.
Nowell: Inter-connectivity is beyond a goal. It is an absolute requirement. Unless we can demonstrate that we can do that, we will not tick the boxes, and our applications will be unsuccessful, so that has got to happen.
Hobson: Saying you can reconcile is one thing. Actually reconciling is another.
Jude: But the difference is this. Without wanting to put fear into the minds of clients – we accept that reconciliation is a very important thing for repositories to consider - the regulation stipulates that clients have an obligation to report. The inter-connection or reconciliation is up to us to sort out, as an industry, between the trade repositories. The client obligation is satisfied once they report to the trade repository. Whether that is the same repository as the executing party does not matter. The situation is that, while reporting to the same repository can be very simple because you get both sides of the trade in the same place, the responsibility for reconciliation is ours. ESMA have sent out a note recently to say that they need to know what our reconciliation process and procedures are, and how we are going to tackle the issue of reconciliation. So reconciliation is important but, from the point of view of a client, that is the one thing they do not necessarily have to concentrate on right away. However, it is a good question to ask when selecting or talking to trade repositories.
MacBeth: There are knock-on issues. One is the cost of the infrastructures overall. The more reporting there is, the more our costs are going to go up. It is a structural issue at that level. The second issue arises at a compliance level. I do not think anybody wants to be in a position where there are two sides of a trade reported, and they are different, and there is no visibility into the difference. The differences in reconciliation are more likely to occur between entities. So I think people will look at that and wonder if it helps them have a better level of compliance to be on the same platform as their counterparties.
Hobson: If costs go up, the payback period lengthens, and you are already investing a lot of time and money. What is your payback period?
Jude: We have had to put in three years’ worth of projected figures with regards to our fee structures and revenues. ESMA have been very prescriptive in terms of what they want to see from us. But this is something that CME group have looked at, and realised we want to be a key part of the infrastructure.
Gillespie: We have looked at the financials in terms of the clients that are in the pipeline, and the number of contracts we have signed. We are very confident that we are on-target for the trade repository to stand on its own two feet in terms of the actual costs. It is not all about value-added services. You have got to make the trade repository workable and profitable and stand on its own two feet.
Nowell: It is impossible to say what our payback period will be. We would like it to be within those three years, but we have got to consider the opportunity cost, what else we have been doing in the meantime, and exactly when we go live. The further it is pushed backed, clearly the more cost we incur without any revenue.
MacBeth: We have been trying out prices using a five year period to recover our investment up-front.
Wynn: Has anyone suggested a kind of fire drill test for the repositories? We have talked a lot about the clients testing, but have the regulators tested with the repositories as well? Are the regulators confident they will get what they want?
Jude: Ultimately, what the regulators want is to be able to access the reporting. How they are going to get access, when they are going to get access, and how regularly they are going to get access, is still to be decided. We offer reporting schedules. We also offer real-time access. We are also talking about a huge number of regulators. It not just every regulator in Europe, but other Jurisdictions may require the data in real-time as well, including the US. It is a very complicated matter. Reports are split by asset class. There may be currency requirements. There are lots of different areas you need to take into consideration.
Macbeth: There is some work going on to make sure that regulatory requirements are clear, and ESMA is trying to coordinate that initiative. The problem is that we are going to be focused on on-boarding client’s right, and finalising all the test periods the regulatory interfaces will come after the get-go. That has been the experience in other jurisdictions that we have worked in.