Ian Thomas of Quorsus provides some thoughts on the need for the industry to collaborate on establishing data standards.

Amongst the myriad of Trade Reporting artefacts published recently, two were particularly interesting and deserve some attention: ESMA’s Annual Report 2019 and Work Programme 2020 (“Annual Report”), and the EMIR Reporting Best Practices (“Best Practice”), published by multiple Trade Associations.

The Annual Report makes clear that, six years after reporting began, Data Quality remains a major headache for ESMA and the European NCAs, with the matching rates still as low as 30%. Even pairing is less than 60%.

Why is it so poor?

Well why wouldn’t it be? There’s nothing in the rules obliging firms to pair and match their trades and, more significantly, there is plenty of scope for inconsistent submissions. That’s right, two well-meaning counterparties can happily submit different, fully compliant trade representations even though they won’t match.

Yet the Annual Report states that “ESMA considers successful reconciliation as a gateway to high quality of EMIR data”. Let’s face it, regulators in EU and UK can’t really begin to comprehend systemic risk if over 40% of the trade records don’t reconcile.

ESMA considers successful reconciliation as a gateway to high quality of EMIR data

On the one hand, the EMIR technical standards allow for flexibility of data submission whilst on the other hand, consistent standards are essential to reconcile and achieve the G20 objectives.

The Best Practice tries its hardest to get some consistency, but without some degree of enforcement or encouragement from the regulators, where’s the incentive for firms to report a different external representation of a trade to their internal one? Firms have other issues to deal with, re-formatting reports that are already compliant is not a priority.

The Annual Report goes so far as to list the fields that are most problematic, making for some interesting interpretation:

The top two fields are both timestamp fields – no surprise there! But think about it, these might be key control fields, but how important to an understanding of systemic risk is a confirmation timestamp?

Next up are Effective Date and Maturity Date – the latter is especially key to an understanding of open positions, but a quick glance at the Best Practice and ESMA’s Q&A shows there are a raft of clarification needed for both ETD and OTC products.

Price / Rate follows: even for OTC products, there are multiple options depending on the type of Trading Venue. So again, no surprise it’s a problem to reconcile.

The thing is (and this is what should focus reporting firms’ attention), ESMA are beginning to recognise that a huge amount of money has been, is being and will continue to be spent on sending trade records (over 9 billion since 2014) to TRs, for very little value in terms of the stated objectives.

What might ESMA do? Tighten the rules perhaps? Wouldn’t it be far better for the industry to propose an approach that works for all than to be subject to an imposed standard? After all, they achieved it with Credit Derivatives to the huge benefit of pretty much everyone. So it can be done when properly organised and motivated.

detailed rules have proved to be not sufficiently precise.

The industry has an opportunity to respond, now that ESMA have published their latest consultation paper, which specifically seeks to address data quality issues, and acknowledges that “detailed rules have proved to be not sufficiently precise”.

This is where collaborative initiatives such as Best Practices come in to play. No one suggests they are perfect or complete yet, and no one suggests they can cover everything. However:

• The more we can focus on initiatives that seek a standard approach, the more likely we’ll see matching and paring rates increase.
• The more reporting firms respond collaboratively to the issues that cause matching fails, the more ESMA will recognise that the industry can help make things better.
• The more ESMA co-operates with industry initiatives such as Best Practice and the work of CPMI and IOSCO, the more likely we’ll see the ESMA rules enhanced to provide more clarity.

As with previous initiatives that led to standard data representation, it needs a collaborative approach, it needs incentives, but it’s possible, it will just take a long time. We’ve been reporting under ESMA since 2014. Will it take another six years to get it right?

At QUORSUS, we are making Data Quality a core part of our mission and we are already working with a small group of firms to improve data standards as we look forward to SFTR, the CFTC re-write, and much more. More updates to follow. In the meantime, get in touch if you want to learn more.