LONDON, May 4 (IFR) - The European Commission has proposed measures to alleviate the reporting burden on derivatives end-users as part of a review of rules governing the US$544trn over-the-counter swaps market.
In its review of European Market Infrastructure Regulation, which was adopted across the European Union in 2012, the commission proposed an end to dual-sided reporting that required both counterparties to submit data on derivatives trades. The proposal is part of a series of measures that are intended to simplify derivatives rules and reduce the burden on non-financial end-users.
“Our aim is to simplify rules as well as to eliminate disproportionate costs and burdens to small companies in the financial sector, corporates and pension fund,” said Jyrki Katainen, vice president for jobs, growth investment and competitiveness at the European Commission. “The targeted changes will deliver real benefits for the industry, without endangering financial stability.”
Under the proposals, financial counterparties would be obliged to report trades on behalf of non-financial counterparties that are not subject to the clearing obligation. Intragroup transactions, where at least one of the counterparties is a non-financial company, would be removed from the reporting obligation altogether. EMIR’s remit also extends to exchange-traded derivatives, which would be reported by central counterparty clearinghouses on behalf of both sides of the trade.
The proposal represents a sea change for European policymakers that heralded dual-sided reporting as crucial to improved robust data standards. But the requirement has proven unpopular with derivatives participants, creating additional cost and complexity for end-users with little obvious gain. For trade repositories, which see hundreds of millions of trades submitted each week from counterparties in the region, the requirement to match two sides of a trade has proven to be cumbersome.
“What conceptually sounds like a straightforward exercise in transparency and reconciliation in reality has proven not to be so,” said Matt Hoffman, director of global regulatory solutions at Chatham Financial.
"No two systems appear to capture and convey trade details in exactly the same way, such that trade matching rates have been lower than might have been expected. In our experience, most of the discrepancies that arise in the attempted matching process are really more about form and less about substance.”
A shift to single-sided reporting would bring Europe closer in line with the US, where bank dealers bear the responsibility for reporting over-the-counter swaps trades under Dodd-Frank.
“I don’t think it’s a coincidence that this would align European rules more closely with the state of play in US derivatives regulation. In fact, most other jurisdictions have minimised or eliminated many reporting burdens that corporate entities could face,” said Hoffman. “We suspect this could represent another step along the path to global simplification and cross-border harmonisation.”
The end-user community has been closely monitoring developments since the review got underway in 2016. While levels of compliance still vary, some have already invested heavily in technology to meet their reporting requirements, but relief is likely to outweigh any concern over compliance-related resources.
Additional proposals would see pension funds given a new three-year extension from central clearing to allow counterparties and clearinghouses to develop a solution for funds to clear their swaps and meet margin requirements without affecting pensioner revenues. According to estimates, pension funds and policyholders face additional costs of up to €1.6bn associated with swaps clearing.
The changes could also promise to lift more non-financial corporates out of the clearing obligation altogether, with only non-hedging contracts counting towards the thresholds that trigger mandatory clearing for those entities.
A new threshold based on volume of derivatives would be introduced for financial counterparties, such as small banks or funds that account for the majority of counterparties but a small part of the derivatives market by notional volume.
According to the commission, it is not economically feasible for financial counterparties with a limited volume of OTC swaps activity to fulfil the clearing obligation.
To increase incentives for smaller counterparties to clear their swaps on a voluntary basis, the commission requires clearinghouses to provide fair, reasonable and non-discriminatory commercial terms and to clarify that assets and positions recorded in clients accounts would not be used as part of the CCP or clearing member’s insolvency estate.
A separate proposal aims to remove regulatory disincentives and ease the treatment of client margin held by clearing member firms by amending calculation of the leverage ratio within the capital requirements regulation.
The changes will come into force following approval by the European Parliament and European Council, though some provisions may have a deferred application. (Reporting by Helen Bartholomew)