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Transaction Reporting to be Limited to Eight Categories of OTC Derivatives, New Common Data Standards on the Way, Says CESR

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As part of the overall ongoing review of MiFID, the Committee of European Securities Regulators (CESR) has added further qualifications to the OTC derivatives that must be included in transaction reports and indicated that for these instruments further “common data standards” are incoming. This follows the consultation paper it released with regards to classification changes for “complex” and “plain vanilla” derivatives earlier this year and it includes the feedback received from the 13 market participants about the individual data items that must be included in transaction reports for these instruments.

For the purposes of increased clarity around transaction reporting requirements, CESR has decided to focus on the following categories of OTC derivatives: options; warrants; futures; contract for difference (CfDs) and total return swaps (TRS); spreadbets; swaps (except CfDs, TRS and credit default swaps (CDSs)); CDSs; and other “complex” derivatives.

The feedback from the market was in relation to the 25 questions posed by CESR in its consultation paper, one section of which focused on the population of certain transaction report fields per type of derivative. The changes mean firms will have to add in these specific fields to their downstream reporting systems and pull this data from their reference databases. One such requirement, for example, indicates new venue identifiers to be included to differentiate between OTC derivatives from off-market transactions of instruments admitted to trading.

To this end, the paper states: “The venue identification should be XXXX in order to differentiate transactions on OTC derivative instruments from off market transactions of instruments admitted to trading, marked as XOFF. CESR acknowledges the comment from Fédération Bancaire Française – Association Française des Marches Financiers (AMAFI/FBF) and confirms that a transaction on a derivative that is solely admitted to trading on a multilateral trading facility (MTF) or platform and not on a regulated market is not subject to reporting as an OTC derivative.”

The latter statement indicates that rather than using a separate code for OTC instruments traded on MTFs, the standard Market Identifier Code (MIC) will be used.

CESR has also indicated a number of other changes to individual fields such as in the case of OTC options with multiple expiration dates, the field should be filled in with the latest expiration date and for CDS, the ISIN of the reference bond should be reported for the identification of the ultimate underlying instrument. This indicates the much more prescriptive approach the regulatory community is taking towards the data contained in the reports that it receives from the industry. Data quality and checking have been on the table for some time and with this level of prescription, it will be much easier to take action against those that fail to comply.

The industry feedback has shaped the final guidance that has been provided by CESR to assist national regulators with the introduction of OTC transaction reporting (available to download at the bottom). The level of prescription of this guidance is to the individual fields in reports for each type of instrument.

Respondents to the consultation paper, however, raised a few very valid concerns about the way CESR has conducted itself thus far and potential issues in future that have not yet been directly addressed. For one, the consultation timeline was very short for a comprehensive response to such detailed recommendations, making it difficult to assess the full ramifications of the data impacts. AMAFI/FBF indicated that the timing constraint meant it was unable to consult “European counterparts” or to benchmark its feedback with others’.

There is also potential for duplication of efforts in future due to the non-standardised approach of individual regulators across Europe, thus impacting the data flow for downstream systems within pan-European financial institutions. A number of respondents including the British Bankers’ Association (BBA) and AMAFI/FBF suggested that CESR should therefore provide more clarity to these pan-European firms about how they should tackle this reporting challenge.

The potentially high costs of “significant system changes” was also raised by a number of participants. The Association Française de la Gestion Financière (AFG) indicated that data exchange on OTC derivative transactions is still poorly automated between market participants and warned that CESR should closely consider that this new mandatory transaction reporting should ensure minimal developing costs for the asset management industry.

AFG notes: “The industry clearly needs sufficient time to properly prepare the implementation. A good idea would be to start with a limited number of OTC instruments and then extend to other OTC derivatives.”

AMAFI/FBF encourages CESR to envisage a “phased implementation” of the new reporting obligations to allow firms to correct errors before moving on to another type of derivatives and to plan in advance their IT developments. It also “strongly” recommends that a list of instruments admitted to trading on a regulated market or a MTF of the EU be made available to investment firms.

The BBA indicates that mandatory reporting of early terminations in the CDS space would be an extension to the current requirements and would require firms to make significant systems changes. “As they understood, informally, that CESR are hoping to begin the exchange of OTC derivative transaction reports by quarter four 2010, they indicated that this is not nearly sufficient enough time for their membership to have the correct systems in place to begin reporting early terminations. They argued that the industry would require a minimum lead time of six months for systems developments upon publication of the final specification from their home competent authority,” states the CESR report.

These concerns were also briefly touched upon by speakers at the MiFID Forum events earlier this month, especially the discussions of the Transaction Reporting Subject Group. Industry participants are seriously concerned about the amount of investment and effort that will have to go into getting ready for these changes on the reference data management side of things in a potentially limited period of time.

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