Lack of clarity over buy-side derivatives reporting responsibilities

New derivatives regulation will require all derivatives trades to be reported to trade repositories – but some confusion exists over who has the responsibility to report

Some uncertainty exists over the reporting obligations for buy-side firms that transact derivatives – with some market participants arguing that end-users that rely entirely on their counterparties to report on their behalf could end up in hot water.

Under an agreement reached by the Group of 20 (G-20) nations in September 2009, all standardised over-the-counter derivatives must be cleared through a central counterparty (CCP) and, where appropriate, traded on an exchange or electronic trading platform by the end of 2012. All derivatives transactions, both cleared and uncleared, must be also reported to a trade repository.

A number of regulators have either published or are close to finalising rules that incorporate these commitments. In the US, for example, the Dodd-Frank Act requires all swaps to be reported to a registered swap data repository. In general, the reporting obligation lies with the registered entity or counterparty having the easiest, fastest and cheapest access to the data required – so a swap execution facility (Sef) would report swaps executed on it. Counterparty reporting would follow a hierarchy, giving swap dealers or major swap participants the duty to report when possible, and limiting reporting by other counterparties to situations where there is no swap dealer or major swap participant counterparty.

As such, some participants think the reporting obligations on buy-side firms will be limited. "I don't believe reporting obligations will be too impactful," said Ayman Gammall, vice-president, OTC derivatives clearing at Barclays Capital, speaking at the TSAM Europe conference earlier this week. "If it is traded on a Sef, it will be their obligation to report. If it is not on a Sef but at a CCP, then it will be up to the CCP. And if you are still bilateral, then there's a ranking around major swap participants. So reporting requirements, I would say, are perhaps not relevant."

Not everyone agrees with this interpretation, however. Each national regulator is likely to require local currency derivatives, as well as trades involving at least one domestic counterparty, to be reported to an onshore repository. That means each trade might need to be reported to multiple repositories in different locations – and buy-firms should not bank on their counterparties fulfilling those obligations, argued John Wilson, ex-global head of OTC clearing at Royal Bank of Scotland, also speaking at the TSAM conference.

"I think asset managers do have a considerable challenge around transaction reporting. It might well be that Barclays Capital or Morgan Stanley or Goldman Sachs will undertake to report your trade for you. But will they undertake to do that in all the jurisdictions that you need to report to?" he asked.

"For example, if I trade with Barclays Capital in London, it might be that the fund I am trading for is a US fund that takes on US obligations. The US reporting requirements will demand it goes to a US trade repository because the US doesn't recognise foreign trade repositories. If you happen to be trading with an Israeli fund, then the Israeli central bank will demand you report to it as well, so one has to consider whether the person you are trading with will undertake to satisfy all your reporting requirements with all your clients. If they don't, then somebody else has to," said Wilson.