The trade associations ISDA, EFAMA, EVIA, FIA, GFMA, and GFXD have published ‘Best practice’ guidance for firms on how to populate fields in EMIR trade and position reports. The best practices, released on 3 March, cover both OTC and ETD “and were developed to improve the accuracy and efficiency of trade reporting and to reduce compliance costs”. If firms follow the new guidance it should also improve the matching rates between the counterparties when they submit a report referencing the same trade (both counterparties have to report their version of the trade and ESMA uses the ‘match’ statistics as a quality indicator).
The trade association initiative should therefore be applauded as many firms believe there are gaps in the regulatory technical standards and the ESMA Q&A that require the firms to make an interpretation on how the field should be populated. Historically, the matching rates have been disappointing and the new best practices document should help them arrive at the same interpretation of how the fields should be populated resulting in an improvement in matching rates. However, a number of issues remain:
Legal status of the best practice document
In short, it has no legal status as it is not endorsed by ESMA. So although it is a very helpful as an educational document for the industry and it should help improve the matching rates, there is no guarantee that the regulators will consider all the interpretations to be correct (although the trade associations have discussed the best practice document with regulators).
Potential contradictions with the ESMA requirements (e.g. Clearing member ID)
This is a difficult one. For example, take ‘Clearing Member ID’. The trade association best practice for ETDs is that this field shall only be populated in instances where the reporting party is not the clearing member. This makes perfect sense to me. Unfortunately, ESMA’s Q&A answers the question: If a counterparty is itself the Clearing Member (CM) to a trade, should it be reported in both the “counterparty” and “CM” fields?” with ‘yes’. Since the trade association best practice seems aligned with the RTS, rather than the Q&A, perhaps it’s safe to follow best practice.
However, there are other instances where there seems to be divergence from the Q&A that doesn’t have the clear and obvious support of the RTS. For example, the ETD best practice for deliverable currency is that it should only be populated where the asset class is ‘CU’ for currency. Again, this seems sensible, but TR Q 47 says the field should be populated ‘for all single currency derivatives, as well as those with a specific FX component.’
Gaps in the best practice document
Whilst the document provides best practices for many fields, it is not comprehensive. For many fields, best practice is not required – for example, it should be obvious to all how to populate ‘Reporting counterparty ID’ (although we still see a number of errors with this field!). There are a number of others, such as ‘Beneficiary’. ‘Report Tracking Number’ and the infamous ‘Position Level UTI’, where best practice is required. However, trade associations need to complete discussions with ESMA before they can provide best practice for all fields.
Will all participants adopt the best practices?
Best practices will only increase the matching statistics if all participants follow them. It is impressive that seven major trade associations have reached agreement on best practices for a number of the fields. However, not all participants will be represented by these trade associations. For example, the CCPs may have differing views. Perhaps this is best evidenced with the ‘Maturity Date’ field where the best practices document notes: “Reporting firms populate this field with the ‘last trade date’ which conflicts with CCP’s interpretation of this field. Most CCPs populate this field with ‘settlement date’. Regulatory guidance required.”
So in our view the best practices document is a valuable tool to help firms increase the quality and matching rates of their EMIR trade reports. However it is not a panacea for the myriad of EMIR trade reporting difficulties. As we have said before there are some fundamental issues that make EMIR trade reporting more of a burden than it should be for firms and less valuable than it should be for regulators.
If your EMIR reporting isn’t up to best practice, we can help. Please get in touch for a conversation with one of our regulatory experts to find out more.
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