Often the legislation definitions of product classes don’t match exactly with the industry terminology which is used by OTC derivative providers and brokers.
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Information on specified transactions in financial instruments is required to be reported to regulators in many regions around the world. Compliance with trade reporting regimes can result in costs and resource expenditure for firms. TRAction Fintech was founded to reduce the compliance burden by taking care of your trade reporting.
The requirements vary by jurisdiction and the following information may need to be reported:
- The type of financial instrument (e.g. derivative, bond)
- The counterparties to the trade
- Any intra-day modifications
- A Legal Entity Identifier (“LEI”) and transaction and product identifiers
The data needs to be reported to the relevant regulator through a Trade Repository (“TR”) or other body nominated by the regulator.
The Objectives of Trade Reporting Requirements for OTC derivatives
The overarching objectives of the regulatory trade reporting requirements for financial products are to:
- Enhance the transparency of trade information available to relevant authorities and the public.
- Promote financial stability.
- Support the detection and prevention of market abuse.
The Markets in Financial Instruments Directive (“MiFID II”) and its related regulation the Markets in Financial Instruments Regulation (“MiFIR”) is European legislation which covers reporting requirements for monitoring and market abuse purposes. The reporting regime in MiFIR effectively covers many financial instrument transactions in Europe. MiFIR requires transactions to be reported to an Approved Reporting Mechanism (“ARM”) and has 65 information fields which need to be populated.
The European Market Infrastructure Regulation (“EMIR”) is a separate regulatory regime requiring reporting of information related to derivatives trades. It has applied since early 2013 and requires reporting for financial system risk reduction purposes. Some of the requirements are different to those contained in MiFID II/MiFIR and the reports are sent to ESMA approved TRs. However, parts of the requirements overlap, making it possible to seamlessly report trades for both MiFIR and EMIR.
OTC derivative information is reportable under the Derivative Transaction Rules (Reporting) 2013 to a Trade Repository that is licensed in Australia as an Australian Derivative Trade Repository (“ADTR”). The entities that are required to report include foreign entities with branches and subsidiaries in Australia. In the case of hedge trades, relief may be available where the hedging counterparty is reporting.
The Monetary Authority of Singapore (“MAS”) requires parties to a Specified Derivatives Contract (“SDC”) to report to a licensed Trade Repository or licensed foreign Trade Repository.
Currently, only interest rate, credit and foreign exchange derivatives contracts are required to be reported to a licensed TR in Singapore and only when traded by certain entities. Equity and commodity derivatives are expected to be reportable from 1 October 2018.
Global commitment to derivatives reform arose out of the Global Financial Crisis (“GFC”) in 2008. The GFC highlighted structural deficiencies in the global derivatives markets and the systemic risk that those deficiencies posed to wider financial markets and the real economy.
In the lead-up to the GFC, those structural deficiencies contributed to the build-up of large counterparty exposures for which the risks were not appropriately managed. With details of derivative transactions generally held only between the counterparties, in many cases those exposures were not transparent to other market participants and regulators.
The regulatory response, in the form of commitments by regulators around the world to implement derivatives reform, was made at the Group of Twenty (“G20”) Summit in Pittsburgh in 2009. Since then, transaction reporting regimes have been introduced in multiple jurisdictions and are continuing to be amended and updated.