CME Reg Reporting Competitors Vie to Fill the Void Ahead of Withdrawal

In mid-May, news broke that CME Group would scale back its regulatory reporting businesses, including NEX Regulatory Reporting (NRR), NEX Abide, and its European and Australian trade repositories (TRs).

The reporting units covered several global reporting regimes, such as the European Market Infrastructure Regulation (Emir), the latest Markets in Financial Instruments Directive (Mifid II), the Markets in Financial Instruments Regulation (Mifir), the Securities Financing Transactions Regulation (SFTR), and the Australian Securities Investments Commission’s Derivative Transaction Rules. Users of these CME regulatory units are now scrambling to find a new vendor to help them manage these reporting challenges, and the clock is ticking away as users need to make the switch before November 30, 2020.

Sources say a sticking point for the switchover is that few providers offer the same suite of services as the CME, which includes its reporting hub services, custom integration, an Approved Reporting Mechanism (ARM), an Approved Publication Arrangement (APA), and EU and Australian-based trade repositories. In this case, current CME clients may have to consider outsourcing to multiple vendors, meaning several different switchovers, integrations, contracts, and pricing schemes—all in the midst of a global pandemic.  

As a result, financial firms are shopping around and evaluating several regulatory reporting vendors. In an effort to help with the transition process to a new provider, CME also published a list of 22 providers on its website, including the services they cover and where there are gaps. 

This is a disruptive event—no one actually anticipated it—and as a result, a common comment from customers is, ‘We don’t want to be put in this position again.

Brian Lynch, Bloomberg

An executive at one of those listed vendors says clients are first asking if the company can cover all their needs—for many clients, it can’t—and then it turns into a beauty pageant that incorporates a provider’s reputation, pricing, tech stack, and client support. When evaluating multiple vendors, that process can become a slog.

“To start with, it seemed like a great idea [to publish the list], but the problem is that it has created a scenario where many firms are now going through a vendor assessment with five to six different vendors, and that takes very long,” the executive says. 

CME has more than 200 clients for its Abide TR business alone, according to sources with an understanding of the business. While an exact list of CME’s clients is unavailable because of NDAs, a former CME Group employee who worked on the reg reporting team says that Man Group uses the CME for Mifid II-related needs and that Jump Trading and Tower Research Capital use them for Emir reporting. (Man Group has confirmed that it is a client of CME’s regulatory reporting services, while Jump and Tower did not respond in time for publication.)

One executive at a competing service provider says that CME clients “are playing TRs and providers against each other to try and get them to drop their prices,” adding that this could further add to what is already an unhealthy pricing culture, which is what largely led to the CME, as well as Deutsche Börse, unwinding their reg reporting businesses.

This creates a new wrinkle: Those who are leaving CME do not want to end up picking a new vendor that, itself, ends up unwinding its business in the future, says Brian Lynch, global head of regulatory reporting services at Bloomberg. As a result, vendors will have to prove that a sustainable regulatory services group is a core pillar of their overarching business model.

“I think the overriding issue for clients is that they don’t want to have to change providers for these services ever again,” Lynch adds. “This is a disruptive event—no one actually anticipated it—and as a result, a common comment from customers is, ‘We don’t want to be put in this position again.’”

The Switchover

As the CME goes about unwinding these business units, competing firms are rounding up their resources to grab a slice of that unwound marketshare.

Many providers are offering converter (or adapter) capabilities, which will convert and map Mifir or Emir reporting to the respective ARM or trade repositories that they connect to. TRs, for example, have unique technical specifications (that is, they have to be reported via XML or CSV files) and data standards that need to be adhered to. In the case of CME, competing firms—including UnaVista, Bloomberg, SteelEye, MarketAxess, and Cappitech—are providing (or are in the process of providing) integration functionality to minimize disruption when switching over to a new provider. The feature allows the firm to continue reporting in the same format as it has been to CME’s TRs, and it will convert the messaging into the new provider’s respective format.

Although using a converter can be highly convenient for the institutional firm when transitioning over to a new system, it comes with underlying challenges, says Len Delicaet, head of regulatory reporting strategy at MarketAxess’s post-trade business (formerly Trax).

“You have to remember there are inbound and return legs of data. So when you send data to a trade repository—or an ARM, or a national competent authority—they need to feed that back to you, and [then] you need to translate that back. And in the translation, like any translation, if you’re talking about English to Russian, to Chinese, to Swahili and back to English again, there could be loss of data quality, slight nuances, or even a loss of functionality when you do translations—so it’s not a silver bullet [solution],” says Delicaet.

We cannot support two standards in perpetuity, and at some point in the future—perhaps when there is a big regulatory change, and everything has to be re-jigged and re-tested—we will move those firms to a single UnaVista specification.

Tom Wieczorek, UnaVista

Providers are working with CME to develop and refine their converter capabilities, using CME’s specifications and sample data. However, from a TR perspective, these conversations are more patchwork jobs so as to facilitate the transfer before the end of November, says Tom Wieczorek, global head of product management at UnaVista, a subsidiary of the London Stock Exchange Group.

“We cannot support two standards in perpetuity, and at some point in the future—perhaps when there is a big regulatory change, and everything has to be re-jigged and re-tested—we will move those firms to a single UnaVista specification. I think in the short and medium terms, that use of converters just lessens the burden on the firms,” he says.

John Kernan, senior vice president of product management at Regis-TR, adds that vendors are having to clear an extra hurdle during this conversion process—the Covid-19 pandemic-induced lockdowns—and that they have created a dedicated transition management team to help with onboarding. 

“Particularly with the current lockdown situation, handholding clients through submission of account opening documentation and onboarding, and supporting them with all manner of their inquiries, it is even more important,” Kernan says.

In addition, the various regulatory regimes have their own requirements that need to be ironed out during the transfer process. Take, for example, Emir: the migration process will require institutions to have their entire historical reporting data moved to the new designated trade repository.

The European regulation sets out the defined portability process in the event of a trade repository losing or surrendering its license. Porting the historical data to the new TR is necessary to enable a regulator or National Competent Authority to gain access to past regulatory reports, at their request.

Although the TRs themselves are able to adhere to these portability rules, Ronen Kertis, CEO of Cappitech, says the challenge is meeting the deadline if everyone waits until the last minute, which will create capacity issues for TRs.  

“So, a client would be oblivious to this whole [portability] exercise, where the concern is that if all clients are going to move at the eleventh hour, the trade repositories will not be able to move that number of terabytes of data over few a weekends, as that work can only be done over the weekend,” Kertis says.

Mind the Gap

CME’s Abide business is known for offering bespoke services and good deals on pricing to attract large institutional clients, such as building customized solutions for various platform integrations or providing data standardization services. But the question is, what will happen to the population of firms that have relied on these nuanced offerings to complete their reporting obligations? Although CME’s unsustainable pricing model and overly customized offerings are believed to have led to the downfall of its reporting arms, some providers are looking at ways to fill those gaps and enable some wiggle room for bespoke integrations.

“The remaining trade repositories and providers need to fill that gap, so I imagine UnaVista and others will end up somewhere in the middle where there are some bespoke offerings that we can adopt in a safe, standardized, and resilient way,” Wieczorek says. “There will still be some need for firms to adjust and make small changes, and we’re trying to minimize that by using converters, but again, we can only build core software to generic standards with some bespoke work, as we all have limited capacity for bespoke work.”

When any major players exit a market, particularly those competitive on price, the spotlight also turns to service costs and how this will impact the end user’s pockets.

When it comes to Emir, Abide’s TR has a competitive pricing model. The former CME employee says the exchange operator offered the best deal on the market for data aggregators or regtech vendors that provided delegated reporting services on behalf of investment firms, particularly for those with large volumes.

Reporting for Emir is typically priced based on volumetric bands, and some TRs—like UnaVista and Regis-TR—have broken down their pricing into individual fees, including a charge for each transaction message or per Unique Transaction Identifier (UTI). Others, such as the Depository Trust & Clearing Corp. (DTCC), charge a standard account management fee and subsequent costs are based on the volume of over-the-counter or exchange-traded derivatives.

Val Wotton, head of product development, strategy, repository, and derivatives services at the DTCC, says that the firm will not be making changes to its pricing schedule and that it will continue to offer a single price, with no additional hidden fees for its services, including user acceptance testing, onboarding, submitting trades, client support, and the port through which to access the reporting data. He adds that the DTCC does not charge for a negative acknowledgment (NAK) or error messages when calculating the cost of the reporting.

Similarly, Wieczorek says UnaVista has no plans to increase its TR’s reporting costs, and that the vendor community is playing a role in stabilizing prices.

“We at UnaVista have no plans to use this situation as an excuse for price hikes or commercial advantage. Of course, we want to attract more business and we believe in the value of the community, but we are required to keep our prices affordable, fair, and our accounts are audited by the regulators to make sure we don’t make too much money. So, I think if anything, those non-regulated entities provide a reality check and are keeping the pricing levels down because we, the regulated firms, are to a degree forced to compete with those non-regulated services,” he says.

Kernan says Regis-TR is committing to a “tariff freeze” until 2022, at the earliest, for clients. As all EMIR pricing must be non-discriminatory and transparent, this will apply to all existing and newly onboarded clients.

The Unknown Future

After the CME announced on its website that it was planning to unwind its regulatory reporting business, WatersTechnology first reported that Deutsche Börse was going to follow the Chicago exchange’s lead. While the CME looked for a buyer, executives eventually decided that they’d simply have to do away with the service. Deutsche Börse is still unsure about how it will exit its business units, which includes the Regulatory Reporting Hub, Approved Reporting Mechanism (ARM) and Approved Publication Arm (APA), but it, too, might have to go down the path of unwinding.

Several sources also believe that CME and DB will not be the last to fall—rumors of others potentially leaving the space are percolating. This puts end-users in a precarious position. Acquisitions of vendors are always disruptive for banks and asset managers, but the best deals are beneficial in the long run to everyone. Right now, though, it does not appear that there’s much appetite for deals to be made in this space.

Without a dance partner and in the face of increasing cost pressures, some others might have to simply leave the room, too. That is painful for an end-user, because then they have to scramble to find a new vendor, which means a whole new recruiting process, price haggling, contract signings, and integrations. As Bloomberg’s Lynch noted before, end-users don’t want to have to go through that kind of a process for something that is not a differentiator for the firm. 

So the winners of CME’s lost business (and perhaps eventually Deutsche Börse’s) will be those who can both compete on price and show that they have the gumption to survive in the long term when there’s a price war underway. Perhaps the space will contract to the point where there’s a utility that rules them all, but right now its simply a race against a ticking clock as there are only 151 days left before the CME wipes its hands clean of this mess.