Data Interoperability Needed For Hedgers After EMIR Deadline

Differences between EMIR and Dodd–Frank reporting requirements in the US can be found in both the breadth of which market participants are covered, and how immediately.

Both aspects arguably involve a heavier lift in Europe—where the “two-sided” reporting mandate covers buy-side firms and corporate hedgers, and does so with a single deadline, rather than phased-in, approach. According to Rob Friend, London-based global head of fixed-income products at Bloomberg, those twin aspects have upended the operational calculus that buy-side firms of varying sizes would originally have taken to cope with the problem.

"It's a real spectrum," Friend tells Buy-Side Technology. "The easy option appeared to be to delegate all reporting to dealers, but for the larger shops, once the number of dealers expands to a certain point or even when a single dealer can't provide delegated reporting, the model begins to fall apart," he says.

Paul Tivnann, Bloomberg's global head of FX and commodities electronic trading, likewise adds that "corporates will often move positions around inter-group or among subsidiaries, so they will need to report those transactions independently, adding weight to the argument that they take ownership for all their reporting. At that point the decision becomes whether to build in-house, or finding an external provider like Bloomberg."

Seeking Agreement
UTI generation—essentially a reference data problem—is therefore only one part of the issue. Perhaps equally important, and less well-developed, is awareness around which UTIs can (and can't) be exchanged and consumed by whom as part of a new execution ecosystem that is now complicated by central clearinghouses. A related challenge is sifting through the proper trades to report. For instance, hedging instruments for corporates—currency or interest-rate swaps among others—must be vetted and amended appropriately. Tivnann points out another typical example.

"Last week we met with a large UK-based pension fund client, for example, and they weren't familiar at all with the issues around those UTI agreements. For people accessing bank liquidity through the Bloomberg FXGO platform, they will receive a UTI from us, but need to confirm whether their dealers are able to consume it, or if will they be generating their own UTI and sharing that with their customer for dual reporting for a short period, while they adapt their technology." - Paul Tivnann, Bloomberg

"Last week we met with a large UK-based pension fund client, and they weren't familiar at all with the issues around those UTI agreements," he says. "For people accessing bank liquidity through the Bloomberg FXGO platform, they will receive a UTI from us, but they need to confirm whether their dealers are able to consume it, or if they will be generating their own UTI and sharing that with their customer for dual reporting for a short period, while they adapt their technology."

The right reporting solution, therefore, must be constructed with those issues in mind, with interoperability and links built in to match what is still a messy and—for a would-be, in-house build—expensive process. It's a case of the technology carefully helping clients determine who should take “ownership” of the UTI, before it heads downstream.

"International Swaps and Derivatives Association (ISDA) best practices guidelines suggest that the identifier be created as close to the point of execution as possible," Tivnann continues, pointing out that banks may reach this final agreed ideal through a multi-staged process put forward by the Global Financial Markets Association (GFMA).

"If a corporate is looking to put on a trade via a single-dealer platform, obviously that dealer creates the UTI; however on a multi-dealer venue, the platform itself should generate the identifier and send it back to both counterparties. That's how the waterfall should flow, but right now many banks just aren't ready to receive or consume those platform UTIs. As such they will be generating their own, to be distributed to the buyside as part of trade confirmations, and it is extremely important that both the bank and customer agree on which UTI—platform or bank generated—is being used to identify the trade through the regulatory system,” says Tivnann.

'Joining Dots'

Indeed, even though EMIR doesn’t mandate it, common sense suggests that utility-like knowledge and technology be bound up and offered by a centrally positioned provider such as Bloomberg.

Friend stresses that there is always high risk in enacting this much change in such a compressed period of time. "From the outset of the design process, we always prioritized avoiding a black-box, and making the service as open as possible," he says. "We recognized that many of our terminal clients wouldn’t always be executing on Bloomberg platforms for every trade." That should pay dividends down the road in the form of greater affinity—if not total painlessness or regulatory convergence—around the reporting process, once the benefits of experience grow and interpretative wrinkles are worked out. 

"One of the challenges that large institutions operating in the US, Europe, and elsewhere, face is that regulatory reporting won't always treat the same products similarly across jurisdictions. Obviously the less commonality you have, the more exceptions need to be built into the systems managing the distribution of the trade data, and that gets very expensive." Friend explains.

As Tivnann says, it's ultimately about joining dots. "We've always sought to design new regulatory functionality that seeks to provide as seamless a transition as possible for customers who may have used our system for years, whether for pre-trade decision support, news research, pricing evaluation, execution, or post-trade risk analysis. Reporting should just be another dot on that curve."

The Bottom Line

• EMIR and Dodd-Frank reporting requirements are set to take full effect this year, with wider European demands around matching, two-sided unique trade identifiers' generation and usability proving a challenge for buy-side firms and corporate hedging desks, alike.

• Execution platform providers like Bloomberg have developed tools and connectivity for clients whose dealers are unable to provide or consume properly configured data.