Part Two: On the path to global regulatory harmonisation in trade reporting

Continued from Part One on July 14

One of the recommendations that the CPMI and IOSCO proposed was to have a global governance structure. They suggested, and this has been adopted now, that the Regulatory Oversight Committee [ROC] which oversees the legal entity identifier, would provide the governance for the maintenance and implementation of critical data elements.

Childs said: “The ROC has now established that governance structure, which is a positive thing. That said, the ROC doesn't have authority over each of the local regulators and so its role will be one of observation, comment, and influence. The lack of a powerful governing oversight to push for co-ordinated regulations is evident in the standards that apply to firms reporting their trades in different jurisdictions.

“You've got two-sided reporting versus single sided reporting, which is different from one jurisdiction to the next. Delegated reporting is mandatory in Europe, which is not required in other jurisdictions. Also, in Europe, trade repositories are required to reconcile trades reported by counterparties to different trade repositories, which is not needed in a single sided regime.”

Childs acknowledges that the problem of regulatory disharmony is of low concern to its clients that operate in only one market, but to those that operate in multiple jurisdictions a lack of harmonization is more problematic.

 “Any firm reporting to multiple regulators has to understand all of the rules in each different jurisdiction, and they need to code and develop systems for those different regimes. That is expensive. In addition, institutions trading in multiple jurisdictions not only have coded for the original rules, they now must develop new code for all the rewrites. And to the extent that those rewrites are not on a globally consistent regime, it's much more expensive.”

Greater harmonisation is not only beneficial to reporting firms however, Childs added.

“From the regulatory perspective, the more harmonised the data is, the more useful the data is. If you're trying to look at trading activity globally and holistically as a prudential regulator trying to understand systemic risk would do, then you may need to work with other prudential regulators and share data sets. The shared data would only be helpful if it is the same across the jurisdictions.  Otherwise, the prudential regulator will need to go to some lengths to amalgamate and interpret the data. The prudential regulatory environment, therefore, is enhanced by harmonised data.”

Childs said an important area of focus for clients going forward is the message format mandated by national regulators.

“All firms, whether they're reporting to a single jurisdiction or multiple jurisdictions, should pay close attention to the rules as they're being rewritten. One area of particular focus is whether a regulator is mandating the message format that the reporting party must adhere to.

“We're expecting ESMA Refit will mandate the inbound submission message to follow an ISO 20022 format, which is a similar approach they took with Securities Financing Transaction Regulation (SFTR). Currently, the trade repositories administer the inbound submission message, so we’ll have to adjust to a new message format if mandated. Right now, we use a combination of CSV or FPML inputs.”

Childs said that other regulators are now looking at mandating ISO 20022, so it's important that clients understand whether they are going to have to adhere to a single message format eventually. In fact, the CFTC rules and the recent ASIC and MAS consultations suggest ISO 20022 will be implemented when its available.

“We have concerns around the regulatory implementation of ISO 20022. It looks like most of the regulators, whether they mandate it or not, will at least have a version of an ISO message.

DTCC has lobbied for an individual ISO 20022 message based on the critical data elements. “We believe that to be the easiest to implement, not just for those that are reporting, but for the regulatory community as well. However, at this moment in time, it appears the regulators are going down a path of stipulating their own ISO message version for each jurisdiction.”

Childs said DTCC believes that is a mistake. “We're concerned that over time, if there are individual ISO messages per jurisdiction, the message formats may move out of alignment.

“On the other hand, if you have a standard ISO message based on critical data elements and there are any changes required within those critical data elements, they could be put into that one message.”

Firms also need to think about the timing of regulatory changes and ensure they are allocating resources effectively, for example with respect to the implementation of a unique product identifier [UPI].

“Implementation of UPIs won’t only change trade reporting, it means that at the time of execution, counterparties are going to need to make sure they have a unique product identifier for whatever is being traded. That could change trade execution or trade capture processes,” said Childs.

DTCC is also watching the implementation of UPIs, “likely to go into production in Q2 or Q3 next year.”

Childs said: “UPIs include data elements which are currently required to be reported. What is not clear is whether there will be duplication of reporting where you need to report the UPI and the underlying fields. The question is, will the onus be on the trade repository to make sure the data within the message that relates to a specific trade ties to the UPI? Does the regulatory community plan on requiring data elements that are also included in the UPI to be reported to TRs? If so, what is the expectation when the data is contradictory (the value in the UPI differs from the submitted value)? Should the TR reject the transaction? Should TR ignore the submitted data elements? All of this needs to be ironed out as the UPI for trade reporting is implemented.”

Tomorrow: Part Three of the series looks lessons learned from the global COVID-19 pandemic