European regulators say they have a huge task ahead improving the quality of data from trade repositories before it can inform future discussion on whether, under the Markets in Financial Instruments Regulation (Mifir), ancillary activities are properly defined, commodity position limits correctly set and the suitability of pre- and post-trade transparency provisions determined.
Speaking in a panel debate at the International Derivatives Expo held in London on June 9, Sander Van Leijenhorst, senior supervision officer at the Netherlands Authority for the Financial Markets, said: "We get all the data from the trade repositories and currently the main job we are doing right now is digesting all that. We get all the data daily in huge amounts – gigabytes. We are analysing that and making use of it but we have to improve on that and a priority is to get a data-quality balance… to have a better view of the derivatives markets."
Van Leijenhorst also conceded it is a costly and operational burden for reporting entities to report data in the right quality, but once that is achieved it could be used in discussions to inform future policy.
Chairing the debate, Simon Puleston Jones, the chief executive of the Futures Industry Association (FIA) Europe, said: "Data is one of the biggest challenges facing regulators, not only in receiving accurate data but being able to analyse it promptly and ensure that thresholds are set at the right level."
Further to the paper published by FIA Europe this week entitled 'A review of the cumulative effects of European derivatives law reform', Puleston Jones called for an end to exchange-traded derivatives (ETD) reporting in Europe, on the basis that the material data for ETDs is already held by exchanges and central counterparties on which they are traded and cleared. The European Market Infrastructure Regulation (Emir) regime is therefore unnecessarily duplicative.
Puleston Jones asked panellists if the quality of data might be improved by facilitating single-sided reporting as part of the review of Emir. Under Emir, both counterparties to a trade are held accountable for ensuring trades are reported, unlike the US Dodd-Frank Act, where the responsibility lies with only one side.
Edwin Schooling-Latter, head of market infrastructure and policy at the Financial Conduct Authority (FCA), responded: "That can be looked at as part of the Emir review."
But, he added: "I wouldn't want to necessarily hold it out as the answer. Probably there is some painstaking work to do at quite a granular level in terms of raising the quality of the data to what we need." Schooling-Latter said analysing good-quality data from trade repositories would be essential to successfully set the ancillary activity exemption from the second Markets in Financial Instruments Directive (Mifid II) for commodity derivatives traders, or in the Emir review to establish which entities would be caught by clearing obligations and which might find it difficult to access clearing. He said: "When we address those questions, the best chance we have of getting them right is using the data that is in these trade repositories."
In February 2014, market participants began reporting over-the-counter and ETDs to trade repositories under Emir. Announcing a review of Emir on May 29, Jonathan Hill, European Commissioner for financial stability, financial services and capital markets union, said it was a good time to "see if there are lessons to be learned".
The introduction of global trade reporting has not gone smoothly. It was described as "a mess" by industry participants at last year's Sibos conference. The US Commodity Futures Trading Commission (CFTC) was previously reported to be drowning in swaps market data while more recently the CFTC has stepped up enforcement of data-reporting violations. In Asia, too, poor data quality has been said to jeopardise OTC trade reporting.
Stefan Pankoke, director at the division for OTC derivatives markets supervision at the German prudential regulator, said he was concerned with the huge amount of resources required by Bafin to digest the data it receives and to map it with regulatory requirements. "To give an example, it is not evident that Emir trade repository data will be sufficient to really apply the exemptions from the [Mifid II] position-limit regime. Tremendous efforts lie ahead of us in this area... the position-limit regime is one of the most complex areas within Mifid we have to struggle with."
Pankoke added the task of implementing Mifid II – which will massively increase transaction reporting obligations – was not helped by "budgetary restraints" at the European Securities and Markets Authority (Esma), with whom national regulators must exchange vast amounts of data.
Phyllis Dietz, acting director, division of clearing and risk at the CFTC, sympathised, saying the US regulator found itself in a similar position: "In terms of reporting we need new technology and infrastructure at the regulator to be able to take in new data and distribute it to the appropriate people and manage the data flow. It's also important to have good follow-up, to look at the data and ask if it is clean data, and if it isn't fix it."
Esma has postponed its review of standards for Mifid II until September, reducing the amount of time the fund industry will have to assess proposals ahead of implementation.
The FCA's Schooling-Latter said the earlier the industry sees this detail the earlier it can start on implementation, adding he found compelling arguments for at least early selective publication of technical standards covering data fields and standards for transaction reporting.