"What a mess": market reflects on start of Emir reporting

Anyone looking for a short, punchy verdict on the arrival of Europe’s new derivatives reporting regime could do worse than the three words uttered by a senior finance executive at one German corporate, two days after it came into force: “What a mess.”

And he was one of the lucky ones. For days after the February 12 deadline arrived, some users of the repository run by the Depository Trust & Clearing Corporation were unable to report – victims of a backlog – while the data submitted by those that made it through the door was enough to overwhelm other parts of the service. Tens of thousands of other corporates had left their preparations too late to be caught in either trap. Firms involved in issuing pre-legal entity identifiers (LEIs) – the unique tags that every market participant requires in order to report – say they expect to be handling applications until at least the middle of the year.   

The sad thing about all of this, some market participants say, is that it was predictable – inevitable, even. Speaking in October last year, Martin O’Donovan, deputy policy and technical director at the Association of Corporate Treasurers in London, predicted “massive non-compliance”. In late January, Bob Pickel, chief executive for the International Swaps and Derivatives Association, reiterated those fears: “The trade reporting deadline is coming up on February 12. Everybody has to start reporting all transactions, on both sides. It’s going to be a very challenging deadline to meet. In fact, many market participants won’t meet it,” he said at a legal conference in the Netherlands on January 27. 

Regulators only fired the starter’s gun in early November, when the first repositories were registered. Just 90 days later, market participants were expected to start reporting all new listed and over-the-counter derivatives to one of these new services, as well as backloading the data for existing portfolios under certain conditions. That sounds simple enough, but the requirements are entirely new for many firms caught by the rules, and some firms did not even know they were caught.

In addition to the pre-LEI that every company requires, each transaction needs a unique trade identifier (UTI), but with no advice or direction from the European Securities and Markets Authority (Esma) about how UTIs should be generated, the buy side and the sell side were at each others’ throats, and nothing was getting done.

We sent a letter outlining the choices to several thousand clients and got about 20 responses, half of which said 'what's a UTI?'

“UTIs are going to cause chaos. It was a huge mistake by Esma to say: ‘Hey, you’ve got to agree on that yourself,’” said one treasurer at a large German corporate a week before the reporting rules took effect. Esma’s stance later changed, and the authority suggested a way of assigning responsibility for UTIs – it was published at 6pm, Paris time, the day before reporting began.

And market participants were not the only ones confused. The UK’s interpretation of the Markets in Financial Instruments Directive – from which Emir derives its definition of a derivative – excludes some foreign exchange contracts, contradicting statements from the European Commission, and prompting Esma to call on February 14 for the UK to be overruled.

Risk followed the unravelling of the regime in a series of news stories. The recent highlights appear below.

Legal entity identifiers (LEIs)

Eight days before reporting was due to start, Risk reported 83,337 LEIs had been issued in the EU – with estimates of the required total ranging from as few as 100,000 to as many as one million. The market was not ready, and regulators had recognised the fact, said Crispian Lord, regulation partner at consulting firm PwC. 

“There has been concern regarding the wider implementation and compliance readiness around Emir in the communications I have had with regulators,” said Lord. “They have sought to engage with as many bodies as they can and to hold seminars and other events, but there is a recognition that reaching all of the targeted institutions will be a challenge.”

Across the continent, issued pre-LEIs ranged from 24 in Lithuania to 21,873 in Germany. The fourth largest European economy, Italy, had just 1,415 pre-LEIs, putting it fourteenth among EU countries. Issuers of the identifiers, known as pre-local operating units (LOUs) predicted a last-minute rush in applications, but even Germany had a long way to go, with predictions of up to 50,000 entities needing an LEI in Germany alone.

On the reporting start date, the nine pre-LOUs in the EU shared the number of pre-LEIs they had issued with Risk, and six also disclosed their estimates of the total required – only one of the issuers had reached its estimated target. 

In Finland, analysis by the Federation of Finnish Financial Services suggested more than 10,000 entities would need an LEI, but on February 12, the local pre-LOU had handed out just 1,166. A spokesman told Risk he expected most firms would file their application by the end of 2014.

Poland’s pre-LOU, Krajowy Depozyt Papierów Wartościowych (KDPW) had only issued 1,822 pre-LEIs, despite anticipating a need for around 8,000. Italy’s pre-LOU, Unione Camere, said on February 12 it had issued 5,698 identifiers, despite one source close to the project estimating it might need to reach 20,000 to 60,000.

The Netherlands’ pre-LOU, the country’s chamber of commerce, had issued 5,086 pre-LEIs out of an anticipated 8,000, while Germany’s pre-LOU, WM Datenservice, issued 34,335 pre-LEIs by the deadline, compared with an expected 30,000 to 50,000. The Czech Republic’s pre-LOU was expecting to hand out 4,000 pre-LEIs in total, but had only issued 2,100 as of the start of the regime.

The pre-LOU in France, the Institut National de la Statistique et des Études Économiques, had issued 11,281 pre-LEIs, and the UK’s pre-LOU, the London Stock Exchange, had issued 12,350 pre-LEIs. Neither provided an estimated end-goal.

Only the Irish Stock Exchange met its demand target, issuing 1,368 pre-LEIs by February 12, but it would not reveal what it had forecast.

Unique trade identifiers (UTIs)

Without an LEI, firms would be unable to generate a UTI, but in the days before reporting began, questions were rife.

“We asked clients whether they wanted to generate UTIs or would like us to do so,” said a London-based regulatory expert at one European bank. “We sent a letter outlining the choices to several thousand clients and got about 20 responses, half of which said ‘what’s a UTI?’” The dealer added that if clients hadn’t replied by a certain date, the bank would assume the responsibility of generating the UTI.

Corporates told a different story, and were frustrated banks weren’t taking the lead. No banks had any firm information on how they planned to proceed, said one corporate, while Pedro Madeira, assistant treasurer at UK airline operator Heathrow Limited said only four banks had requested the company’s LEIs, meaning the others would not be able to generate UTIs. Another frustrated UK corporate was considering contingency plans, such as generating a temporary trade ID and later modifying it when the official UTI was created.

Germany’s Volkswagen started contacting banks in October to request UTIs for trades that would need backloading. It was not happy with the response. “Unfortunately, less than 5% of the banks were able to do it. So we reached the end of 2013 and asked again, but some are saying they have to implement a new piece of software in their systems and may not be ready until early February,” said
Thomas Bartelt, head of the global financial risk management team at Volkswagen in Wolfsburg, speaking a week before the deadline arrived.

UTIs are required by Emir to ensure all reported trades can be accurately identified. Because both sides to a transaction are required to report, and are free to choose their own repository, the trade-level identifier is a way of ensuring the separate reports can be paired off.  

Speaking to Risk, the Financial Conduct Authority confirmed it would allow a post-deadline bedding-in period for firms to comply with the new rules. The regulator declined to say how long it would wait before handing out fines.

Trade repositories 

Just a day after the reporting regime took effect, a flood of rates transaction reports overwhelmed the DTCC’s repository, prompting it to shut down services that allowed users to access their data. 

Risk obtained two emails sent from the DTCC to its clients on February 13, informing them they would not have access to certain services “to alleviate the backlog of rates inbound processing ”. The firm later sent a second email regarding a backlog processing exchange-traded derivatives, adding the cause had been identified and a fix was in the works.

The upshot for customers was that they could not see data once it entered the trade repository – a particular issue for clients that had signed up to banks’ delegated reporting services. The regulatory obligation remains with the end-user, even if banks take on the act of reporting, meaning the client is required to check what the bank has reported for accuracy. 

A second repository, Regis-TR, experienced similar issues, publishing a notification on its website announcing that “unprecedented demand” had meant turnaround time was “not as quick as we would have liked”.

By the end of the first week of reporting, more worrying reports were surfacing. Heathrow Limited and another UK corporate that spoke on condition of anonymity, were unable to report anything to the DTCC after the firm failed to onboard the corporates in time. Both companies had to refrain from putting on new derivatives as a result.

A source at one firm using the repository put the DTCC’s shortcomings down to an overwhelming amount of data entering the DTCC’s repository after signing up so many clients for Emir. “They were pretty widely accepted as the de facto trade repository for many firms as they were already doing Dodd-Frank reporting. I suspect they may be victims of their own success,” the source said.

The DTCC responded to Risk’s questions with an emailed statement: “We have processed successfully over 10 million new messages on the first day. We continue to see high demand for our service and continue to process applications received.”

Four months of confusion – Risk's Emir reporting coverage:

Emir reporting questions pile up for corporates: www.risk.net/2298019

Esma: No 90-day reporting delay for post-Emir trades: www.risk.net/2319281

UK and EC clash over forex reporting exemption: www.risk.net/2323442

Many firms will not meet Emir reporting deadline, says Isda’s Pickel: www.risk.net/2325327

Corporates held up as start of Emir reporting looms: www.risk.net/2324616

Thousands of derivatives users not ready for Emir reporting: www.risk.net/2326624

Missing UTIs will cause reporting chaos, corporates warn: www.risk.net/2326870

LEI issuance well below targets as Emir reporting begins: www.risk.net/2328013

Esma calls for EC to overrule UK on forex reporting: www.risk.net/2329113

DTCC users unable to access data after repository is overwhelmed: www.risk.net/2328853

DTCC backlog leaves corporates unable to comply with Emir: www.risk.net/2329268