Stay On The Ball

At a time when cost containment is the name of the game at most financial firms, heads of compliance are being kept on their toes by a series of changes to the implementation dates of new regulations—each of which raises questions about which regulatory projects should be prioritized.

The Foreign Account Tax Compliance Act (Fatca) and the European Market Infrastructure Regulation (EMIR) and are among the recently delayed regulations. However, Chris Johnson, HSBC Securities Services’ London-based head of product management, market data services, says these remain two of the most imminent and challenging regulatory initiatives. He says they must be addressed urgently, along with the central counterparty (CCP) clearing requirements of the US Dodd Frank Act and plans for a Europe-wide financial transaction tax.

The introduction of EMIR has been pushed back from September 2013 to January 2014, when reporting of interest rate swaps and credit default swaps begins, with reporting of other types of over-the-counter (OTC) derivatives expected to be phased in during the first quarter of 2014. Central clearing is expected to start in mid-June.

To prepare for EMIR, firms must ensure they have access to a wide array of data, including a unique transaction identifier and unique product identifier (UPI), which will be available from recognized affirmation utilities. Johnson says Emir also underlines the importance of ensuring the legal entity identifier (LEI) system is beyond reproach, because the regulation requires unique counterparty identifiers that will be supplied by the LEI system and its forerunners.

“The Global LEI system is under construction at present and its future success is in the hands of the LEI Regulatory Oversight Committee,” says Johnson. “If it is done properly, it can achieve what the regulators intend, but plenty of potential banana skins must be navigated to ensure success is achieved. That is why the integrity of the identification codes and the ancillary entity data, the differing turnaround times of the pre-local operating units [which supply pre-LEIs] and thoroughness of duplication checks are of utmost importance.”

EMIR compliance is also complicated by a number of differences between its requirements and those of the Dodd Frank Act. “For its pre-UPI, the US is following the International Swaps and Derivatives Association taxonomy and adding together the fields, which could make it very long—potentially up to 70 characters,” says Johnson. “This adds complexity, because it means you could have different lengths and different types of UPI for Europe and the US. So any systems that are going to carry this will need to be able to store extensive field lengths to include it.”

Requirements under Fatca that firms perform additional due diligence when onboarding clients and withhold tax at 30% on US-sourced income to non-compliant accounts have been pushed back from January 1 to July 1, 2014. However, Johnson says this is no reason to take your eye off one of the most significant challenges on the horizon for data managers.

Johnson says firms will need to have identified their US accountholders a few months before Fatca comes into force, so they will have time to get the appropriate tax identification numbers from the US Internal Revenue Service. Firms participating in Fatca and which have been deemed compliant will also have to get global intermediary identification numbers.

However, Johnson says the most challenging part of the regulation is the requirement to identify assets that are generating income from the US. He says not all data vendors have shown willingness to supply this information because they do not believe there is enough demand in the market. Johnson believes this may be because some firms may have underestimated the amount of data they will need for Fatca.

“A lot of the major firms are in countries that have the intergovernmental agreements [bilateral agreements with the US that reduce the impact of Fatca compliance] and they may take the view that they don’t need all the information because they believe they are excused through this,” says Johnson. “Another reason [there has not been more demand for data vendors to provide data about US-sourced income] may be because some of the larger financial services firms have their reference data managed in the US, where the impact on underlying reference data might not be as obvious as it is for those managed from outside the US.”

With big changes around the corner, it is crucial firms have an accurate picture of all the data they will need.