Custodians Face Trade Reporting Headache Amid ESMA Deadline

Custodian banks active in the delegated reporting space are scrambling to fill the gaps of missing information as another deadline set for European trade repositories loom.

The European Securities and Markets Authority (ESMA) has told Europe’s trade repositories (TRs) that from December 1, 2014, they must reject trade submissions where certain reportable fields have not been supplied, according to a notice from the Depository Trust & Clearing Corporation (DTCC).

This comes following months of frustration of a lack of standards in trade reporting, whereby TRs have largely been unable to identify paired over-the-counter and exchange traded derivatives.

But the problem custodian banks are facing, through their delegated reporting business, is obtaining a complete set of data from their clients and their managers in order to meet the standards set by ESMA from December 1.

For example, for a single interest rate swap there are 80 reportable fields custodians must meet for delegated reporting. Furthermore with the collateral and valuation reporting requirements, there are 15-20 reportable fields on top of this they must meet.

“From the custodian perspective, our underlying clients may have multiple external investment managers who would be performing all the trade matching and confirmation processes for them,” says John Southgate, head of derivatives and collateral product management, EMEA, Northern Trust.

“Historically the information custodians have received in those types of relationships would not fulfil the trade repository requirements.”

Under the European Market Infrastructure Regulation (EMIR) all derivatives including OTC, futures, and FX trades must be reported either by the counterparty of a trade or by a third party provider.

Northern Trust began delegated trade reporting in February, and later partnered with Sapient Global Markets Solutions in September to enable its clients to meet the reporting obligations while managing costs.

However for custodians to obtain this additional information to meet all these fields, it means a huge workload in getting this data from the external managers of their clients in a standard format, and then sending it to the TR within the T+1 timeline.

The tough stance taken by ESMA comes amid complaints that the regulator has failed to clarify standards on producing the Unique Trade Identifier (UTI), an alphanumeric code designed to enable trade repositories to match trades with other repositories.

But for custodians in the delegated trade reporting business, if they are unable to gain a complete data set to meet the UTI standards, it could mean a majority of their trades being rejected by the TR.

“If we were to send a transaction without a UTI, those would be rejected. So there is a big push for providers, like ourselves, to work with our clients and their counterparties to make sure all those gaps are being closed, and a lot of effort is going into that at the moment,” adds Southgate.