In the world of credit default swaps, the key subject at the moment is clearly compliance with regulations such as the European Market Infrastructure Regulation (EMIR) in terms of trade reporting.
Earlier this week the European Securities and Markets Authority (ESMA) approved the registration of the first four trade repositories (TRs) under EMIR, and continues to process TR applications. The registrations will start on November 14, 2013, with the mandatory reporting obligation beginning a mere 90 working days later on February 12, 2014. Regulators were not granted a request for a one-year delay.
Are firms ready for the new challenges? Perhaps, but it depends on your idea of a working system.
One element in ESMA is that all parties must give regulators an instant picture of who holds what. Consider that from a reporting perspective, with legislation like Dodd-Frank, only one side needs to report this information so there hasn't been a need to create a shared reference. Come February 12, multiple parties need to be reporting the transaction so there's a need for a common reference.
Companies have a history of using their own bilateral matching models that can write and identify that information. In fear of reporting something incorrectly to regulators, firms and vendor are in talk about a creating a community model with a unique trading identifier on the back of the match accepted by all parties in the industry.
Of course, there is no obvious way to solve the challenge.
"The gun fired, everyone is running towards the finish line," says Paul Taylor, director of global matching and head of post-trade services at SWIFT, the global payments provider and messaging standard body. "On the security side there is a reasonable amount of conversation on local versus central matching, and the nuances around each of those processes."
The more immediate approach some people are taking is something of a workaround: A bilateral agreement between trading counter-parties saying "just take my reference, you need to take it." Taylor explains, "From a legal perspective this is very complicated with compliance, and from a technology standpoint if you're the person to take in other person's reference you need a way to take it in and propagate it on the trade itself."
More promising are the discussions around a utility play in terms of having vendors or other people in the community provide a service around that space. But challenges await, including convincing firms to give up on their perfectly-functional bilateral models and paying to adopt a new centralized one.
Let the Race BeginNow that the gun is fired the solution will start to be defined. The recent rejection of the extension caused a bit of a scramble in the community as, up to this point, there has been a lot of doubt among clients and vendors in terms of the details of the regulations and when it will go live, explains Taylor. "But now, clearly everything has been set. I really imagine a Darwinian type of approach." He adds that it's still quite worrying that people are still looking at bilateral legal agreements.
SWIFT is hopeful an industry standard will reduce barriers to entry to the networks and lower barriers of trade. A shared reference may also enable players to better comply with future regulations.