The data standardisation issues underlying the decision to push all standardised OTC derivatives to be centrally cleared and to establish new trade repositories have been well exposed during regulatory discussions over the course of this year. In light of this, the European Council’s recent regulatory proposals on the subject include direct reference to potential fines that may be handed out to those failing to report “correct and complete” data to repositories and regulators, and the need for these repositories to use “standardised” reference data.
Under Article 67a of the trade repositories section of the proposals (see page 95 of the document, available to download below), the Council refers directly to the need for repositories to use standardised reference data: “With the aim of promoting straight through processing (STP) across the entire transaction flow, trade repositories shall use or accommodate in their systems, in their communication procedures with participants and with the market infrastructures they interface with, the relevant international communication procedures and standards for messaging and reference data.” One can therefore expect much more discussion about reference data standards to be on the cards for next year, as national regulators and repositories strive to determine what the “relevant” standards constitute.
The proposals also indicate that the EU Council believes it is important that a “uniform OTC derivatives data reporting requirement is established at Union level”. To this end, the new European Securities and Markets Authority (ESMA), as the pan-European successor to the Committee of European Securities Regulators (CESR), will be given powers to fine firms that are found to be breaching the requirements of trade reporting by not providing “complete and correct” information to repositories or the regulator. ESMA will also be able to conduct on site inspections and investigations in order to determine where the breaches are occurring. Firms can therefore expect much more scrutiny of their data quality practices in a hands on fashion, with potential fines and reputational risk in the wings.
The focus is on ensuring data is not duplicated within repositories and positions are only reported once, hence the penalties, which are to be set by national regulators, must be “effective, proportionate and dissuasive”. The Council also notes that in order to function effectively, the trade repositories must be subject to “strict recordkeeping and data management requirements” themselves; data quality is high on the regulatory agenda within its own walls, as well as within financial institutions.
There are also direct references within the proposals to strengthening the current arrangements for data sharing amongst regulators, including tax authorities and other “relevant” bodies, due to the increase in cross border activity. This activity will therefore be overseen by ESMA: “In view of the fact that surveillance of trade repositories does not have any fiscal implications and that many authorities across member states will need access to the data maintained by trade repositories, ESMA should assume responsibility for the registration, withdrawal and surveillance of trade repositories.” Not only will it have powers to fine firms, it will also have the ability to take repositories out of the running.
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