Europe's trade reporting centres face regulatory scrutiny

Trade repositories set up under EMIR have received criticism by ESMA over reporting fees and other teething issues.
By Charles Gubert

With UK asset managers facing widespread scrutiny over their fee practices and transparency arrangements, it was almost inevitable that other corners of the financial services industry would face similar opprobrium. Attention has now turned to trade repositories, following a thematic report published by the European Securities and Markets Authority (ESMA), which called for better fee transparency from these providers.

Trade repositories are a new piece of market infrastructure introduced as a consequence of the European Market Infrastructure Regulation (EMIR). Financial institutions trading exchange traded derivatives (ETDs) or over-the-counter (OTC) derivatives must report details of these transactions to repositories, who in turn provide the information to market regulators in order to enable them to monitor potential build-ups of systemic risk. 

There are currently eight trade repositories regulated by ESMA including Bloomberg Trade Repository, CME Trade Repository, Depository Trust & Clearing Corporation (DTCC) Derivatives Repository, ICE Trade Vault Europe, Krajowy Depozyt Papierow Wartosciowych (KDPW) in Poland, NEX Abide, Regis-TR and Unavista. In its report, ESMA acknowledged trade repositories often adopted different fee schedules. 

While standardised fee schedules are not mandatory under the regulations, “ESMA observed that the level of detail provided in many of the schedules might not be sufficient to allow a counterparty to make an informed assessment and decide which trade repository best suits its needs based on estimations, especially if a counterparty is a small and less experienced firm,” read the report. 

Given that EMIR obliges dual-sided reporting, namely that both parties to the same derivatives transaction must report the relevant data, it is important that fee disclosures are sufficiently clear so that smaller organisations are aware of what is going on.  “Trade associations that ESMA interacted with through the trade repository fees’ review confirmed that more detailed information and explanation of trade repository fee schedules would be useful.”

ESMA said that fee schedules accompanied by explanatory information such as specific examples of fee calculations under certain reporting scenarios would be beneficial for smaller counterparties, “and allow them to make estimations that are more precise on their reporting costs.” The regulator did state some trade repositories had made improvements to their fee schedule explanatory materials, while others were open to the idea.

Providing such explanations will make it easier for derivatives users to benchmark or compare fees across trade repositories.  The report also demanded that trade repositories demonstrate clearly that their charges are cost-related. “Cost-related fees help to prevent discriminatory practices such as adjusting fees to specific client types. This is particularly important given that in some cases the clients of trade repositories are affiliated companies and cost-related fees ensure that they are not treated differently.”

EMIR trade reporting requirements faced a number of initial teething issues when it went live in 2014, not least of which was the poor take up of Legal Entity Identifiers (LEIs) and an absence of regulatory guidance surrounding the issuance of Unique Trade Identifiers (UTIs) and Unique Product Identifiers (UPIs). 

Since then, there has been widespread industry criticism about EMIR’s continued insistence on maintaining dual-sided reporting of derivative transactions in marked contrast to Dodd-Frank which allows for single sided reporting. Dual-sided reporting not only adds costs to derivatives’ users but increases the risk of reconciliation errors at trade repositories as two different counterparties are effectively reporting details of the same transaction, and submissions are not always harmonised.

In May 2017, revisions to EMIR permitted single-sided reporting for transactions entered between a financial counterparty (FC) and a non-financial counterparty (NFC) exempted from clearing. Meanwhile, intra-group transactions where one entity is an NFC have also been excused from reporting altogether. Some firms have complained these revisions do not go far enough with experts calling for a full-scale abandonment of dual-sided reporting in favour of single-sided reporting.