Firms Okay With Expanding Transaction Reporting to OTC Derivatives
August 30, 2010
Buy-side firms and other market players want to expand the scope of transaction reporting to comply with European legislation on best execution to over-the-counter derivatives and introduce position reporting for OTC derivatives as well .
But there are some caveats: the onus should fall on broker-dealers and market makers and the reporting should be done either through trade repositories or directly to regulators, say financial firms. Depository Trust & Clearing Corp., (DTCC) the U.S. umbrella organization for clearing and settling U.S. securities, already offers a trade repository to store data on credit default swap transactions in the U.S. and is planning one for Europe.
Bolsas y Mercados de Valores Espanoles, the operator of Spain’s stock exchanges, is building one for interest rate swaps and other asset classes with the help of Clearstream International in Madrid. TriOptima already operates a repository for interest rate swaps.
Over a dozen fund managers, securities depositories and trade groups representing fund managers responded to a consultation paper published on July 19 by the Committee of European Securities Regulators in Paris which asked if and how transaction reporting should be expanded for OTC derivatives. The comment period ended on Aug. 24.
In its role of harmonizing financial regulations across Europe CESR is guiding the European Commission on how to overhaul the Market in Financial Instruments Directive (MiFID). The legislation, adopted in late 2007, outlines how fund managers and broker-dealers have to prove they are providing end investors with the “best deal” on their trade executions. Since its passage, there has been plenty of market criticism about the high cost of compliance and the lack of consistent and timely data to make trading decisions and evaluate systemic risk.
Under MiFID, buy- and sell-side investment firms must forward transaction reports on bonds, exchange-listed equities and all exchange-traded derivative transactions to regulators in their home market or elsewhere. Reports must be delivered within one day of the execution of trades. So far firms have not sent transaction reports for OTC derivatives nor do they file any reports on the positions in OTC derivatives they hold.
The CESR’s request for comment about transaction reporting for OTC derivatives couldn’t come at a worse time for financial firms. The London offices of some of the world’s largest financial firms have come under fire for their poor transaction reporting and the Financial Services Authority has been swift to levy plenty of fines for either mistakes in transaction reports or not receiving any reports for equity trades.
Transaction reports are more detailed versions of typical intraday trade reports and must include not only an identification code of the security or financial contract involved, but also a description of the transaction, where it was traded and each firm trading it. Currently, firms can send the reports to regulators directly, through the trading venue or through an accredited organization such as Xtrakter in London. Xtrakter is owned by the Euroclear SA family of securities depositories.
Transaction reports are used by so-called competent authorities – aka regulators – to detect market abuse. Position reports allow regulators to more easily view the current outstanding market exposures of given market participants to detect the concentration of systemic risk in the financial system. While transaction reports are prepared daily, position reports could be prepared far less frequently.
