In today’s blog post on the EMIR derivative trade reporting mandate we take a look at delegated reporting. For full disclosure, the parent company of this blog, Cappitech, provides delegated reporting services to help firms automate their EMIR reporting requirements.
What is delegated reporting?
Within EMIR, the framework requires firms to report their over the counter (OTC) and exchange traded derivatives (ETD) to a trade repository. Currently numbered at six, trade repositories collect, manage and secure the derivative data and make it available to financial regulators of the European Economic Area (EEA) to enforce EMIR. (more on trade repositories)
Along with creating a framework for companies to report directly by themselves to a trade repository, EMIR rules allow for the use of third parties that are delegated to report OTC derivative and ETDs on the reporting firm's behalf. The basis behind allowing for delegated reporting is that the EMIR reporting is part of a larger service being provided that simplifies the process for reporting firms.
3rd party delegated reporting examples
Banks - One of the most common cases of delegated reporting is through a bank. As banks are typically the counterparty to derivative trades with their customers, especially non-financial firms, EMIR rules allow banks to report trades to trade repositories for both themselves and their customers. Typically provided as a free service to clients, delegated reporting is offered as an incentive by banks to make it easier for their customers to trade with them. (more about non-financial firm EMIR requirements)
Worth noting though is that banks don’t have an obligation to report on behalf of their clients. Therefore, firms trading with multiple bank counterparties need to handle EMIR reporting themselves or ensure that each separate bank is reporting on their behalf.
Clearing houses - Another example of where EMIR delegated reporting is offered as a value added feature for a larger service is with trade clearing. Clearing houses act as central counterparties (CCP) for certain types of trades. The advantage for clearing house members is that settlement of the transfers of funds and securities becomes backed by the CCP instead of traders needing to have direct relationships with each of their counterparties.
In regards to EMIR, as clearing houses receive all details of the trade such as the counterparty, asset type, instrument, position size and time, they effectively have all information needed to report OTC derivative and ETDs. With this information, many clearing houses such as the CME, ICE and LSEG provide EMIR delegated reporting along with their trade clearing service. Like with banks, clearing houses have programs to provide low cost or free delegating reporting to their members that are paying for clearing services.
Due to the synergies between EMIR and derivative trade clearing, five of the six firms operating trade repositories also are affiliated with clearing houses (the lone exception is the DTCC).
Service providers (The category Cappitech falls into) - The third example of delegated reporting is through service providers. Whereas banks and clearing firms lump EMIR reporting within other trade based services that they earn revenue from, service providers offer delegating reporting on their client’s behalf as part of a reporting solution.
Among the common reasons of hiring a service provider to help with EMIR is due to the complexities of reporting trades directly to a trade repository. These issues include creating a process for the daily collection of trade data, understanding how a firm’s derivative trade records fit within the data fields being requested by a trade repository and validating that the sent information has been reported correctly. Firms trading with multiple counterparty banks who don’t report on their behalf also need a systems in place to aggregate all of these positions and counterparty information to comply with EMIR.
As a solution for the latter complexity, many treasury management solutions (TMS) include features to aggregate derivative trades. With this information, many TMS provides have developed modules or partnered with other technology firms to provide customers with the ability to report these trades directly to a trade repository or on their behalf through delegated reporting.
Another solution are systems to handle high volume trade transactions. Typically associated with online brokers, hedge funds and proprietary trading shops, these solutions integrate with a customer’s trading platform. Trade record information is collected and then reprocessed to fit the required fields of the trade repository. Once this is done, the derivative trades are reported on the customer’s behalf, with the final reporting validated for errors.
The benefit of these solutions that also integrate delegated reporting is the ability to increase efficiency in the ongoing EMIR compliance process. With this type of technology solution such as that provided by Cappitech, once it integrates with a trading platform, ongoing collection or data and reporting can be automated to handle most of the day to day EMIR requirements.
When it comes to cost benefits, three main factors firms should consider when investigating whether delegated reporting is a fit. They are:
- Per trade fees charged by trade repositories
- IT and human resource costs associated with developing a process to report daily for EMIR
- Ongoing resources to handle the compliance process
For clearing members and bank customers, of which their clearing house and banks can handle all of their EMIR reporting requirements, there is an across the board cost benefit. This includes discounted or free per-trade charges compared to direct trade repository reporting and development of a process to handle ongoing data collection and reporting.
For many service providers that provide systems to automate EMIR reporting, a common benefit is the ability to report on behalf of many clients. By doing so, they can take advantage of volume discounts to offer delegated reporting on behalf of their clients for much less than if the firm reported directly to a trade repository. For example, many firms that would incur expenses of $150,000 or more in annual EMIR related transaction fees, could use delegated reporting to cut the figure by 50-70%.
The drawback of service providers though is that there is nearly always a fixed setup fee or ongoing minimum expense per month for their solution. As such, firms with smaller transaction volumes may ultimately pay more in per-trade expenses when using a third party service provider compared to reporting directly to a trade repository.
However, even in this scenario, many reporting firms are still electing to choose a service provider and delegated reporting. The rationale in this decision is due to calculating that the human resource and IT costs associated with handling the EMIR compliance process is more expensive than delegating part of the process to third parties.