Trade Repository Reporting

Trade Repository Reporting
by schwiertz

What is Trade Repository Reporting?

Trade Repository or Swap Data Repository is an entity that centrally collects and maintains the records of over-the-counter (OTC) derivatives (= derivative deals directly between two parties without the supervision of an exchange). These electronic platforms, acting as authoritative registries of key information regarding open OTC derivatives trades, provide an effective tool for mitigating the inherent opacity of OTC derivatives markets.

This market infrastructure is defined and supervised in Europe by the European Securities and Markets Authority (ESMA) under the European Market Infrastructure Regulation (EMIR). Similar regulatory initiatives are conducted in the United States where the Commodity Futures Trading Commission (CFTC) has developed the Dodd-Frank Act regulation, under which Swap Data Repositories are regulated.

Similar to the development of XVA Analytics the strengthening of the derivatives markets regulatory framework is an indirect result of the financial crisis from 2007. During 2009’s G20 summit in Pittsburgh it was agreed that all standardised OTC derivative contracts should be cleared through central counterparties (CCP) by end-2012 at the latest and that OTC derivative contracts should be reported to trade repositories.

Trade Repository Reporting and XVA-Blockchain

Trade Repository Reporting is probably one of the most interesting use cases of the XVA Blockchain, as the benefits from applying blockchain technology to this use cases are directly related to the general characteristics of the blockchain and immediately apparent:

  • Risk reduction from decentral structure and transparency. In contrast to centralized IT systems our distributed ledger technology will reduce operational risk completely. There is no risk of terror attacks and there is no risk of internal fraud. Therefore contingency plans, secondary emergency locations and four-eyes-principles will vanish.
  • Massive efficiency improvements as a result. The superior security of blockchain technology reduces costs for Trade Repository Reporting services tremendously and enables us to offer a very competitive offering to the existing market players.

Advanced Blockchain Solutions will apply for a Trade Repository Admission within the ESMA (European Securities and Markets Authority) rules to comply to global regulations set by the FSB (Financial Stability Board), the IMF (International Monetary Fund) or the G20. Once we receive a legal permission as a Trade Repository we will be able to offer the most promising IT solution available to the specific challenges of upcoming regulatory changes – all thanks to the decentral structure of our DLT extended by smart contracts for capital markets within XVA-Blockchain.

Legal requirements from upcoming regulatory changes

From 1 November 2017, EMIR trade reporting goes through significant changes. From this date onwards, ESMA will introduce revised EMIR Technical Standards including new fields, changes to position reporting, collateral reporting and asset class specific fields with the aim to address potential improvements and existing deficiencies that have been identified since the reporting start date of EMIR in February 2014.

In parallel the implementation of MiFID II in January 2018 is being predicted by many market participants as a Big Bang moment for Europe’s financial markets. This is because the scope of MiFID II/MiFIR is so wide-ranging and covers a much broader range of financial instruments and activities than its predecessor, MiFID I. It includes new rules on investor protection, trading platform classifications and associated rules, more stringency on best execution requirements and greater transparency around trade execution.

Further, MiFID II is extra-territorial – many firms outside of the EU are beginning to realize that they will be captured in the new rules when trading in European securities or with EU regulated firms. For example, this applies to the MiFID II rule on the unbundling and transparency of payment for sell-side research.

While there has been much discussion around how MiFID II will impact the trading landscape of Europe, thus far little has been written about the effect of the forthcoming regulation on the post-trade space. In reality, MiFID II will dramatically alter the post-trade landscape and will require affected firms to make significant changes to their middle and back office activities in order to comply with the new requirements.

The most significant post-trade changes which will be wrought by MiFID II are:

  • Derivatives trading: greater transparencyin derivatives markets through the migration of more over-the-counter (OTC) derivatives trading to trading venues.
  • Greater engagement of the buy-side in transaction reporting: this is likely as a result of the more onerous requirements of MiFID II transaction reporting, including the need to report additional data fields such as the identity of the decision maker in trading decisions.
  • Unbundling of research costs: MiFID II will require the unbundling and transparency of paymentfor sell-side research and will therefore enforce strict separation between payment for research and payment for execution commission.
  • Adoption of LEIs: from the start of MiFID II implementation, investment firms which are subject to its transaction reporting rules should not execute a trade for a client without that client having a valid and verified LEI.

As can be easily recognized from highlighted text snippets above, the application of blockchain technology as defined in XVA-Blockchain in the wake of upcoming regulatory changes is almost a no-brainer and a logical next step in the evolution of capital markets. And Advanced Blockchain Solutions is at the gravity center of this development.

Please keep in mind: the complexity and scope of MiFIR/MiFID II was acknowledged by regulators when its implementation date was delayed by a year to January 2018, and industry collaboration to prepare for the changes is a positive trend. MiFID II and MIFIR is in place and the industry needs to start implementing alterations to their post-trade processes now in order to ensure they are ready for CSDR or SFTR and margining.

Or in other words: the time is just right for Advanced Blockchain Solutions’ disruptive and innovative approach using blockchain technology to help the finance industry get ready and in place for its next chapter.

Our next step is to become a repository for all securitisations that comply with the ‘Simple, Transparent, and Standardised’ (STS) criteria set out in the Securitisation Regulation (Regulation (EU) 2017/2402).

In 2020 our reference and market data services for derivatives will be enhanced by trade repository reporting.