Banks to Corporates Prepare for Big Bang of EU Swaps RulesJim Brunsden
Companies from banks and technology firms to energy suppliers are set to face European Union swaps rules, amid warnings from some businesses that they may not have all the systems in place to meet this month’s deadline.
Starting Feb. 12, firms in the EU must begin systematic reporting of their derivatives transactions to data banks known as trade repositories. The measure marks the EU’s implementation of a global agreement targeted at preventing any repeat of the financial crisis that followed the collapse of Lehman Brothers Holdings Inc.
The rules are “a huge administrative requirement” for non-financial companies, Richard Raeburn, chairman of the European Association of Corporate Treasurers, said in a telephone interview. “It is a big issue.”
The reporting requirements stem from an accord among the Group of 20 Nations aimed at bolstering the resilience of the $693 trillion market for over-the-counter derivatives -- a term used to describe swaps traded away from exchanges. Regulators say the step will enhance their ability to monitor risk taking, curb market abuse, and make it easier to understand who owns what when a financial institution fails.
Lehman’s collapse in 2008 sparked a wave of litigation and lengthy bankruptcy proceedings, as authorities sought to untangle its various activities and establish ownership of different assets -- a process that continues to this day.
Raeburn said he sees the U.K.’s market regulator, the Financial Conduct Authority, “as setting a sensible example” in how it intends to enforce the EU measure.
“They have indicated that they are sensitive to the problems that the deadline imposes, and we don’t expect them to come down too hard in the immediate period following the deadline,” he said. “We don’t think a formal postponement is the right route.”
The EU isn’t the first jurisdiction to begin applying the rules. Measures are already in place in the U.S. and several other nations including Brazil and Japan.
Still, unlike in the U.S., which opted for a staggered approach, Feb. 12 marks a big bang for the EU, where the rules will take effect for all asset classes on the same day.
Also, whereas the U.S. requirements focus on the sell-side of a trade, effectively placing the responsibility on banks, the EU’s approach requires companies at both ends of a transaction to report, bringing more non-financial companies within the scope of the measure.
While the EU rules provide some flexibility for companies to delegate their responsibility back to the banks, they would retain legal liability. They would also still have to report intra-group trades.
The EU’s decision to opt for dual-side reporting “is a significant challenge for the industry -- especially FX due to the sheer number of counterparties of all sizes,” James Kemp, managing director of the Global Financial Markets Association’s global FX division, said in an interview.
“There is clearly a very wide variation across Europe in terms of readiness,” he said. “We do anticipate that, despite the Feb. 12 deadline, there is going to need to be some degree of forbearance from regulators.”
Michel Barnier, the EU’s financial services commissioner, was the architect of the law, known as Emir. Chantal Hughes, his spokeswoman at the Brussels-based European Commission, declined to immediately comment.
Trade repositories authorized to handle EU data include facilities run by the Depository Trust and Clearing Corp. and CME Group Inc.
While this month marks a step forward for the EU in meeting its G-20 commitment to trade reporting, it’s not the end of the process.
Regulators and industry are seeking to develop a common coding system at international level for recording trades -- known as the Legal Entity Identifier initiative, or LEI.
The range of data that has be reported is also set to further expand in the EU. Requirements to report some details, such as those relating to collateral, will take effect later this year.
Companies have also requested more technical guidance from the European Securities and Markets Authority.
“The big picture” is that trade reporting is moving forward, Kemp said. “When you look at it from 100,000 feet you can say this is moving in the right direction.”