Bonds are a common debt instrument traded by financial firms. Are they EMIR reportable as a derivative, or are they traded on a trading venue and MiFIR reportable, or even both?
Background
Bonds are essentially an IOU and have been around since around 2400 BC in Mesopotamia, originally as grain debt guarantees. Bonds are often used by governments to fund infrastructure projects or war spending. Bonds are also used by large “blue chip” corporations to raise money without diluting their stock.
When a person wants to borrow money, they go to a bank and get issued a loan. When a government or corporation wants to borrow money, it issues bonds and anyone can then be the lender by buying those bonds.
There are 4 key terms used in Bonds:
- Principal: is the full amount
- Coupon: is the annual interest payment
- Maturity: is the date the lent amount will be paid back in full
- Yield: is the actual return (this can be different because the price of the bond can change, if you bought bonds at a discount, the yield would be greater than the original coupon)
How and where do Bonds trade?
Bonds have a primary market and a secondary market.
For government bonds, the primary market is a scheduled auction where they are sold to investors.
The secondary market is where these investors sell them on to other investors, hopefully at a higher price to make a profit.
Are they derivatives?
No, a standard bond is not a derivative. In some cases, bonds can have debt protection or insurance included and this usually leads to them becoming a new product which would fall under the derivatives definition.
Are they exchange or venue traded (TOTV)?
Bonds are usually traded OTC but some bonds can also be listed and traded on a trading venue. This makes some bonds MiFIR reportable and some not.
How to report a bond?
There are several key data points for bonds including:
- Rate
- Price
- ISIN
- Coupon (annual interest payment)
- Delta (for bond derivatives, similar to leverage ratio)
These data points then relate to the following fields in a trade report:
| Field Details | MiFIR | EMIR | ASIC/ MAS |
|---|---|---|---|
| Price | ✓ | ✓ | ✓ |
| ISIN | ✓ | ✓ | ✓ |
| Net Amount | ✓ | ||
| Quantity | ✓ | ||
| Rate | ✓ | ||
| Seniority | ✓ | ||
| Maturity Date | ✓ | ✓ | |
| Maturity / Expiry Date | ✓ | ||
| Final Contractual Settlement Date | ✓ | ||
| Underlying Instrument ID / Reference Entity | ✓ | ||
| Indicator of the Underlying Index | ✓ | ||
| Series | ✓ | ||
| Version | ✓ | ||
| Index Factor | ✓ | ✓ | |
| Tranche | ✓ | ✓ | |
| Underlier Identification | ✓ | ||
| Attachment Point | ✓ | ||
| Detachment Point | ✓ | ||
| Expiration Date | ✓ | ||
| Fixed Rate | ✓ | ||
| Fixed Rate Coupon | ✓ | ||
| Basket Custom Code | ✓ | ||
| Basket Constituent Identifier / Code | ✓ | ||
| Basket Constituent Identifier Code | ✓ |
Summary
Bonds come in several shapes and sizes and can be either EMIR reportable or MiFIR reportable, or both, or none. Ascertaining the reportability is probably the hardest step. The actual data collection and population of fields in the trade report for bonds is only of medium complexity. For help ascertaining the reportability of Bonds or other product, speak to TRAction or a compliance consultant experienced in trade reporting.
How can TRAction assist?
If you need any assistance with your current trade reporting set up, or are new to trade reporting and need to a delegate trade reporting service provider, please do not hesitate to contact us.
