The reporting requirements of European Market Infrastructure Regulation (EMIR) continue to challenge financial institutions six months after they came into force and ahead of regulatory intent to fine firms that fail to report correctly under the regulation. Industry estimates suggest that, to date, only 1% of trades have been correctly matched under EMIR due to the complexity of reporting using both Legal Entity Identifiers (LEIs) and Unique Trade Identifiers (UTIs), and the need to complete over 85 new reporting fields.
Stephen Engdahl, Senior Vice President of GoldenSource, says it was only after firms began to submit reports that regulators began to understand the scale of the data management issue involved in EMIR. He explains: “This is not the first time we have seen regulators ask for information to be provided and then be unprepared to deal with it. From the perspective of firms that must comply with EMIR, there is a need for more clarification around how data for EMIR should be reported.”
Unlike Dodd-Frank reporting in the US, Engdahl notes that EMIR requires reporting on both sides of a transaction. He says: “When both parties report a transaction under EMIR, there needs to be consistency in the information they provide and the way they provide it. The regulation requires one half of the transaction to be matched to the other half to allow regulatory bodies to understand exposure of institutions to each other in the event that one of them fails.”
In terms of the LEI, the difficulty many firms experience is mapping the identifier to counterparty and client data systems. Engdahl suggests the need here is to centralise entity data and create an entity master that can ease the mapping issue. Going through this process, firms have realised that storing information on securities issuers, counterparties and clients in separate databases has made cross-referencing particularly problematic, especially when each of these databases have different on-boarding and data acquisition processes.
As a result, firms can struggle to recognise that the business entity they are dealing with might be an issuer of securities in one transaction while simultaneously being a counterparty or client in another, because each of the databases presents different identifiers and attributes that make it difficult to make connections.
The requirement for a common UTI between parties to a transaction can also cause reporting problems. Engdahl says that while there are some guidelines on use of the UTI from regulators, the lack of an overall standard has resulted in most transaction identifiers being based on bilateral agreements. Addressing this problem would require a significant regulatory review that Engdahl does not see happening in the short term.
GoldenSource is addressing the EMIR reporting problem with an entity master concept that sits behind core processing and customer relationship management systems, and allows firms to master entities using a platform that overlays existing infrastructure. When an update is made to one of the underlying databases, it is replicated in the entity master, avoiding cross-referencing mistakes and sustaining a common LEI. Engdahl says: “Our approach is to provide out-of-the-box capabilities so that our clients don’t have to handle business analysis, mapping rules and so on. They can access the entity data master from our download centre and apply it to their environment.”
Looking forward, Engdahl does not expect any fundamental changes to be made to UTIs, but does suggest that administration of the LEI by a central authority within the Global LEI System will assist with its implementation and use going forward.