OTC D Transaction Reporting: Common challenges

Since the G20 Summit in 2009, there were several regulations across the globe around OTC derivatives to improve transparency, reduce counterparty risk and standardize derivative products and their booking methods.

Over the last 5 years, Investment Firms and Broker Dealers have gone through some heavy analysis in identifying the impact of the regulations and then making several changes to their operational processes and IT systems right from Client Onboarding/KYC, initial margin, booking entities, trade execution method/venue, trade confirmations, reporting of the various life cycle events of the trade and trade reconciliation.

For each of the regulations, starting with the CFTC rules for Dodd Frank in US, there were several areas required exploring to stay in compliance with the regulation including but not limited to identifying impacted entities and their branches/subsidiaries in the region, list of products falling under the regulators umbrella and granular rules around entity regisration, internal/external business conduct, transaction reporting, mandatory clearing and margin.

In this article, I would like to highlight some of the common challenges in the transaction reporting area for investment firms with high trading volume.

Reporting Timeliness

The reporting deadline for a trading event varies from 15 minutes since trade execution to ASTP (As soon as technically possible) to T+1. Reporting parties need to maintain quick processes and right infrastructure in place to make the executed trade available to reporting system(s) to allow timely reporting. Any spike in trading activity needs to be well handled as any delay in reporting of trades would increase the lateness metrics for the reporting party.

Record Keeping

Trade information needs to be maintained with the trading parties for anywhere around 5 years since maturity/expiry/termination/cancellation. Derivative trades, particularly Credit and Interest Rate have a long life time in years and this requirement adds the need to maintain huge volumes of dead trades easily accessible in addition to those that are live.

Exchange of UTIs

While Dodd Frank requires firms to report using Unique Swap Identifier (USI), EMIR requires firms to report using UTI (Unique Trade Identifier) and brought in the need for both parties to identify UTI generating party and exchange UTIs. While UTI is readily available in case of trades executed on trade execution venues or centrally cleared, others need exchange of UTIs primarily using Confirmation process. In the cases where the other party is the UTI generator, timely and accurate availability of UTI from the other side is critical.

Reconciliation Breaks/Disputes

Each of the regulaitons of their own variation of how the trades, collateral and valuation are reconciled/matched between the reporting parties or even between the Trade Repositories.

Firms need to maintain efficient processes in place to resolve the breaks/disputes. Multiple reasons can lead to these breaks like incorrect interpretation or implementation of one of the rules by either party, use of varying VaR methods, sending down incorrect data to the reconciliation systems, etc

Availability of proper analytical tools to retrieve and analyze trades in quesiton is also vital.

Template Upgrades

There will be upgrades to the reporting templates (CSV, FpML, etc) in between and firms need to allocate resources for handling the upgrades.

Adhoc queries from Regulators/Clients

Be it a query from the regulator on the reported data or from a client in cases of Recon Breaks or Delegated Reporting, firms need a way to mine the reported trade data and trades themselves to identify if its a true issue.

With new regulations coming up and changes ongoing for existing regulations, allocating the right resources across is also a challenge.

Overall, investment firms, broker/dealers, custodians offering reporting service, etc need to create and maintain efficient infrastructure, systems and processes in place to report timely and accurate data to stay in compliance.

Originally Published in LinkedIn on May 25, 2015

About the author

Vishnu Vardhan Chikoti is a co-author for the book "Hands-on Site Reliability Engineering". He is a technology leader with diverse experience in the areas of Application and Database design and development, Micro-services & Micro-frontends, DevOps, Site Reliability Engineering and Machine Learning.