Published by the Australian Financial Markets Association in AFMA Member News, August 2017.
Following the GFC, the leaders of the G20 agreed that all over-the-counter (OTC) derivatives contracts should be reported to trade repositories to help improve transparency, mitigate systemic risk and prevent market abuse.
Since then, significant progress has been made worldwide to implement and operationalise OTC derivative trade reporting. Of the 24 member jurisdictions of the Financial Stability Board (FSB), 19 have already implemented mandatory trade reporting regime for OTC derivatives. A further four are expected to have regimes in place before October this year.
In Australia, the trade reporting regime was implemented in phases that were designed to manage the impact of changes on the market. The first phase, commencing 1 October 2013, targeted the largest banks. The final phase, for smaller financial entities, commenced more than two years later on 4 December 2015. The information provided by reporting entities under the regime helps provide ASIC with additional transparency to evaluate market behaviour.
As part of the ongoing implementation of OTC derivative trade reporting, members of the FSB (together with the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO)) are continuing to work towards a single set of global standards for trade reporting. The aim of this work is to:
- standardise OTC derivative trade reporting across jurisdictions
- reduce the burden on entities reporting OTC derivative data, and
- support global data aggregation.
In February of this year, CPMI and IOSCO issued technical guidance on the Unique Transaction Identifier (UTI). The primary purpose of the UTI is to uniquely identify individual financial transactions in reports made to trade repositories by the parties to a transaction. The UTI helps ensure consistent aggregation of OTC derivative transactions by minimising the likelihood the same transaction will be counted more than once (e.g. by being reported by more than one counterparty to a transaction, or to more than one trade repository).
The FSB has publicly consulted on proposed governance arrangements for the UTI (including a stakeholder roundtable in April 2017) and is expected to publish a report on the consultation shortly.
To help industry with the practical challenges of implementation, we have provided time-limited transitional relief (expiring on 1 October 2017) from the requirement to report the UTI. Working closely with regulators in Singapore and Hong Kong, we continue to monitor developments in the implementation of the UTI. We are also actively looking at what steps may be needed at the time of implementation to make sure it goes as smoothly as possible.
CPMI and IOSCO are aiming to release technical guidance on another key field, the Unique Product Identifier (UPI), by the end of 2017. Technical guidance on other data elements is expected to be published in early 2018.
Another key data element for OTC derivative trade reporting is the legal entity identifier (LEI). The LEI is a standard identifier that provides verified data on legal entities and is registered on a centralised system, the Global LEI System. Use of the LEI is now embedded in the OTC derivative trade reporting rules of some 40 jurisdictions – 14 of which are FSB jurisdictions. LEI coverage has grown in recent years and, as of June 2017, over 513,177 entities from 200 countries had obtained LEIs. The uptake of LEIs is expected to increase further with the implementation of the MiFID II legislative requirements in the European Union from January 2018.
The FSB Regulatory Oversight Committee for LEI (a body comprising more than 70 regulatory authorities, including ASIC) monitors the operation of the Global Legal Entity Identifier Foundation and develops policies and standards to increase the use and improve utility of LEIs, including collection of information on the direct and ultimate parents of legal entities.
In Australia, the OTC derivative trade reporting requirements give reporting entities the flexibility to report the LEI as one of a number of alternative identifiers. Going forward, we will continue to monitor the effectiveness of identifiers.