Headaches Abound for UTI Generation, EMIR Reporting

In my seven years covering the financial services industry, I've become accustomed to hearing something near to this refrain: "These new rules are too onerous, we need more time! For the love of God, the financial system will collapse if we don't get an extension!!!"

Maybe that's a bit of an exaggeration, but not by as much as you might think. Like the boy who cried "Wolf!", it's easy to turn a deaf ear to these complaints.

But when it comes to the "two-sided" reporting mandate that stems from EMIR in the hopes of creating UTI data to bring transparency to the market, a delay might've seemed prudent. After Wednesday's kickoff, the Depository Trust and Clearing Corp's (DTCC's) London-based European trade repository (ETR) was overwhelmed by an influx of customer data. As my colleagues James Rundle and Nicholas Hamilton reported today, while trades could be reported, clients were unable to then access the reports.

On Tuesday, another colleague of mine, Tim Murray, delved into the need for data interoperability for hedgers, specifically, as UTI development combines a reference data puzzle with the demand for enhanced cooperation among execution platforms:

UTI generation—essentially a reference data problem—is therefore only one part of the issue. Perhaps equally important, and less well-developed, is awareness around which UTIs can (and can't) be exchanged and consumed by whom as part of a new execution ecosystem that is now complicated by central clearinghouses. A related challenge is sifting through the proper trades to report. For instance, hedging instruments for corporates-currency or interest rate swaps among others-must be vetted and amended appropriately.

"Last week we met with a large UK-based pension fund client, for example, and they weren't familiar at all with the issues around those UTI agreements," says Paul Tivnann, Bloomberg's global head of FX and commodities electronic trading. "For people accessing bank liquidity through the Bloomberg FXGO platform, they will receive a UTI from us, but need to confirm whether their dealers are able to consume it, or if will they be generating their own UTI and sharing that with their customer for dual reporting for a short period, while they adapt their technology."

The right reporting solution, therefore, must be constructed with those issues in mind, with interoperability and links built in to match what is still a messy and-for a would-be, in-house build-expensive process. It's a case of the technology carefully helping clients determine who should take "ownership" of the UTI, before it heads downstream.

Two-Sided Pain
Two-sided reporting, where both counterparties have to generate a single UTI as close to trade execution as possible, is what introduces complexity and tricky timing into the process.

According to an article that appeared on Waters' sibling publication Risk, as of last week banks were claiming that they were taking the lead in generating UTIs, but that the buy side has been "slow to act and many appear to be in the dark about what's involved." The last part of that sentiment would appear to be consistent with what Bloomberg's Tivnann said of the large UK pension fund, though in fairness, the same has been said of the dealers—that not all of them have yet created workflow flexible enough to consume counterparty UTIs generated elsewhere.

Because of the two-sided nature of this regulation, buy-side firms can't rely solely on the dealers to handle compliance and reporting. Either they're going to have to build something in-house or turn to a Bloomberg or other third-party provider to wrap their heads around the issue. The largest shops can probably handle building a proprietary system, even if some consultants will have to be brought in, but this is likely a significant burden for a smaller asset manager or corporate.

As with any new rule, if firms believe that non-compliance (or slow-to-get-compliant compliance) is easier than the penalties or bottlenecks they face for non-compliance, then this already long-drawn out regulation will continue to trudge along. Judging from some of the troubles that have already developed this week, and the many complaints flooding the market, wait-and-see might—if just for now—continue to rule the day.