Swaps get swapped! Changes to reporting of FX swaps under EMIR leaves us scratching our heads

As nerdy as it sounds, updates to ESMA Q&As are usually an exciting time here at Kaizen HQ. They give us fresh ideas for new tests to code up or clarity on topics that we were scratching our heads over. The newest addition however, TR Question 49 – Reporting of FX swaps under EMIR, has left us quite baffled and asking more questions than we had before.

Since reporting go-live it has been market practice to report the two legs of an FX swap separately. This is true for all G20 regimes, not just EMIR. In FX trading systems, it’s common to book the two forwards separately, confirm them separately and settle them separately rather than book them as an actual swap. With this, it’s understandable why it has become the industry standard to report them this way.

A new method of reporting swaps

TR question 49 has flipped this on its head and is requesting firms to report both legs under the same Trade ID. This will mean that for firms with multiple reporting regimes two separate processes will need to be created to report the same trades. The long term goal of regulators globally should be to work towards a harmonized way of reporting. The new guidance feels like a step away from this ideology.

Reporting of lifecycle events also becomes far more complicated. When one leg of the swap is compressed or terminated, the remaining leg transforms itself into a forward and needs to reported as a brand new report with a separate report.

From a revenue perspective trade repositories could find themselves feeling a bit short-changed. Many trade repositories charge per trade. If the industry does manage to become compliant with the new way of reporting it would mean significantly less data reported.It’s also important to consider what hasn’t been written in the Q&A. Nothing has been mentioned about what firms should do with the billions of swaps that have already been reported. Surely it would be impractical to expect these to be back reported?

Timing will harm data quality

Generally, when new Q&As are published the guidance is effective as of immediately. For this, firms have been given a year to adapt to the new method of reporting swaps. Nothing in the validation has actually changed though, this means that nothing prevents firms from making the changes earlier or not making the changes at all. As a result, different firms will change at different times and this will be harmful towards pairing and matching figures.

At Kaizen we’re all in favour of having clear rules on how trades should be reported. This is the only way data can be consistent and of high quality. This Q&A certainly meets this criterion but the thing that is surprising is that only selective consultation appears to have taken place in producing these guidelines. Unfortunately, this is something we’ve seen ESMA do before. Surely a better way to get everybody on the same page is to make writing them a collaborative effort.  Having proper time to test and provide feedback before new rules are officially published is considered a pre-requisite by many firms to meet the reporting requirements.

We don’t believe anyone responsible for EMIR trade reporting is deliberately trying to shirk their responsibilities, but when surprises like this keep happening it’s no wonder that firms become blinded by change and can’t report correctly. 

If you need help in adapting your EMIR trade reporting to the latest changes or for a discussion about your EMIR reporting quality, please contact us