Industry forced to rethink reporting after Esma rejects GFMA proposal

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The European Securities and Markets Authority (Esma) has rejected an industry proposal for dual trade reporting, creating a setback for foreign exchange market participants as they gear up for compliance with the European Market Infrastructure Regulation (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. This is causing problems for the foreign exchange market, which has no central infrastructure that could issue a single unique trade identifier (UTI) to both counterparties.

To address this issue, the Global Financial Markets Association (GFMA) proposed a ‘my-ref-your-ref' model to Esma in June, under which each party to a trade could assign a UTI and make it available to the other counterparty at the confirmation stage. They would then each include the opposing counterparty's UTI when reporting, and the trade repository would match the two unique references.

However, James Kemp, managing director of the GFMA's global foreign exchange division in London, says regulatory insistence that only one UTI be submitted to a repository has prompted GFMA to reconsider its approach. It is now working with the International Swaps and Derivatives Association, which recently issued its own best practices for trade reporting of derivatives, to tailor Isda's prescribed workflows to the peculiarities of foreign exchange.

"Given the legislative single UTI intent, it was difficult to work out whether or not it was even feasible to take the my-ref-your-ref approach. We've already been working with Isda on its proposal to match prior to the trade repository, and given the four other asset classes are going down that route, to add forex to that makes sense in the longer run, even though it will have its own considerable challenges," he says.

From a standing start to implementation, this was always going to be a big job for the industry

The news could come as a blow to institutions that might have already been working towards the my-ref-your-ref model, says Steve French, director of product strategy at post-trade technology provider Traiana in London.

"From a standing start to implementation, this was always going to be a big job for the industry. But those institutions that have taken a leap of faith and sunk resources and cost into following the my-ref-your-ref model in order to be ahead of the timelines have got some reworking to do," he says.

Bill Stenning, head of clearing, regulatory and strategic affairs at Société Générale Corporate & Investment Banking, says the issue of matching UTIs in foreign exchange has not been a "critical path item" in developing the bank's reporting infrastructure so far, but soon will be.

"Esma feels its needs one unique identifier to enable it to carry out its mission, so we will work towards that. We just need to find a solution that meets the needs of all. The hardest piece is, if you're going to have a single identifier, how do you communicate it to each other? It's not a question of whether you can or can't communicate it, but rather the degree of efficiency, scalability and automation you could build for day one," he says.

According to Kemp, the required infrastructure changes would be the same regardless of whether UTIs are matched before or after being submitted to a repository, as various pieces of information will still need to be exchanged. However, he agrees challenges still exist in generating a common UTI and exchanging data.

"Both parties - including the buy side or end user - are going to have the issue of being able to transmit or consume a code. That's still a very practical challenge the industry faces," he says.

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