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KEEPING UP WITH EUROPEAN MARKET INFRASTRUCTURE REGULATIONS

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Mastan Momin

By Mastan Momin, Director, Head of Regulatory Transaction Reporting group at SS&C GlobeOp

Mastan Momin

Mastan Momin

The G20 commitments have significantly increased the levels of disclosure, granularity, traceability, and regularity of reporting requirements across the globe. The high standards expected by regulators are a challenge to all market participants. The only thing that is constant with the regulatory requirement is the continual change.Since 2014, the European Market Infrastructure Regulation (EMIR) transaction reporting implementation has been wrought with challenges. While the industry looks at the current data quality issues, European regulators are requesting more granularity on the transaction reporting.

SS&C has seen several key trends emerge from this evolving regulatory climate.For example, firms are beginning to leverage technology providers to help them comply with regulations, improve data quality, increase transparency and consistency, and reduce systemic risk and compliance costs.

Large banks likely to move away from delegated reporting

Large banks are likely to move away from providing buy-side clients with delegated reporting services for over-the-counter (OTC) derivatives and exchange-traded derivatives (ETDs) as required under EMIR.

Banks could continue to offer the delegated reporting for a short term, as the service is tied to the execution and clearing fees. We are hearing feedback that larger banks are less willing to offer this service, and the implementation of the revised RTS would add another layer of complexity to their delegation model.

Revised EMIR RTS: what is changing?

The European Commission carried out an extensive assessment to ensure that the EU legislation is working effectively and efficiently. As a result, the revised regulatory technical standards (RTS) and implementing technical standards (ITS) on reporting under Article 9 of EMIR were published in the official journal on 21 January 2017. They will become applicable on 1 November 2017. All the reports submitted upon the date of the revised technical standards on reporting under EMIR must be compliant with the new standards.

The European Securities and Markets Authority (ESMA) has clarified the fields and the descriptions in the revised RTS. It added the guidance provided in Q&A to the regulatory text and increased the number of fields from 85 to 129. The new table will have 35 counterparty data and 94 common data to report.

In the revised requirements, sourcing the data and implementing the changes will be very difficult and complex. The changes include:

  • Unique Trade Identifier (UTI): Until global UTI is available, a UTI must be agreed to by both counterparties. ESMA added the hierarchy to the UTI generating party. ESMA stresses the importance of the counterparties agreeing to the report’s contents (including UTI) in a timely manner before submitting it to trade repositories.
  • Product classifiers: The product must be classified with an endorsed Unique Product Identifier (UPI) or a Classification of Financial Instruments (CFI) code. For the products identified through International Securities Identification Number (ISIN) or Alternative Instrument Identifier (AII), a CFI code must be specified. For products for which ISIN or AII are not available, an endorsed UPI must be specified. Until UPI is endorsed, those products will be classified with a CFI code.
  • Product identifiers: The product must be identified through ISIN or AII. AII must be used if a product is traded in a trading venue classified as AII in the register published on the ESMA website. In addition, the Association of National Numbering Agencies (ANNA) will release the Derivatives Service Bureau (DSB) platform for user acceptance testing in late Q1 2017. The DSB will go live in October, 2017 to deliver ISINs for the derivatives market.
  • Identification of index and baskets: The index must be identified using ISIN. In a case of basket, each basket component that’s traded on a trading venue must be identified with an ISIN.
  • Collateral reporting: Segregated information of margin must be reported; initial margin posted, initial margin received, variation margin posted, variation margin received, excess collateral posted, and excess collateral received must be reported daily.
  • Reporting of valuations: For trades centrally cleared, central counterparty’s valuation must be reported. For trades not cleared by a CCP, the methodology defined in the International Financial Reporting Standard 13 “Fair Value Measurement” must be used for reporting the value of the contract daily.

Trade repositories reconciliation information

Pairing and matching are the two reconciliation steps that are performed by the trade repositories to ensure the records submitted by both parties are reconciled efficiently. The first is the pairing process, where the Legal Entity Identifiers (LEIs) and UTIs are matched to pair the two trade submissions. The second is the matching process, where all reported data of a paired submission are compared.

According to DTCC’s GTR service has 26 percent of the market share of all transactions under EMIR; RegisTR has 34 percent, UnaVista 12 percent, CME 17 percent, ICE 10 percent, and KDPW 1 percent. Trade repositories have the responsibility to perform reconciliation internally and with other trade repositories as per the interoperability provision. This is to ensure that the trades reported by both parties are accurate and further avoid duplication of the transactions. The recent number published by DTCCGTR had the Inter-TR reports matching the rate at 0.59 percent (the 99.41 percent of the records submitted by both counterparties to different trade repositories don’t match).

UTIs have continued to be one of the main reasons for higher unpaired transactions at the trade repositories. Each reported derivative contract is required (by Commission Delegated Regulation [EU] No 148/2013) to have a UTI. The regulation requires that the UTI is unique but does not de ne how it should be generated or by whom. European regulators were late to clarify which counterparty to a trade is required to produce the UTI. However, unsurprisingly, there are many cases where both counterparties are independently producing UTIs and not exchanging them. As a result, the pairing rate is low. Still, with DTCC GTR, 28 percent of the records are unpaired. This has slowed down regulators’ ability to monitor the systemic risk.

The regulatory expectation is that all trades must be matched, which is a rather complex and sophisticated request. Deep learning techniques would be needed to analyze and resolve the billions of already-submitted EMIR transaction records. 

Cost-effective solution

Firms value greater oversight and governance when it comes to regulatory compliance. They do not want regulators knocking on their door. Regulations such as EMIR, Markets in Financial Instruments Regulation (MiFIR) and Securities Financing Transactions Regulation (SFTR) coming at different times and the shifting goal post of various laws has not made it easier to prepare. It is becoming increasingly costlier to run the business, execute growth strategy and onboard new regulations.

In principle, the regulation can contribute to an action plan through impact analysis, requiring firms to think through the regulatory non-compliance outcomes, and demanding justification for taking strategic actions. One of the aspects should be measuring and improving the perception of regulatory changes. There
is no magic wand to resolve the regulatory challenges. It is an extensive and tiresome work e ort to make a decision and to implement a solution.

Investment managers must look to automate the production of regulatory reporting so they can achieve regulatory compliance on time and at a reduced cost. Centralizing the data from different sources, leveraging security master, valuation, collateral, counterparties (and more) to create a reporting hub is proving to be beneficial in the long term. A regulatory reporting hub can be built on an end-to-end model, including the technology component, data re-use,
and transformations. Firms must consider regulatory compliance as a key component of their business strategy.

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Teed off: As COVID fuels S. Africa’s housing crisis, golf courses feel the heat

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Teed off: As COVID fuels S. Africa's housing crisis, golf courses feel the heat 1

By Kim Harrisberg

JOHANNESBURG (Thomson Reuters Foundation) – It sounds like a developer’s dream: A greenfield site in the heart of Cape Town, close to the best schools, hospitals and transport links and big enough to build more than 1,400 affordable new homes. The only hitch – it’s a golf course.

The 46-hectare (114-acre) Rondebosch Golf Club is one of hundreds of golf courses in South Africa facing scrutiny by land rights campaigners as a surge in evictions during the COVID-19 pandemic exposes an acute shortage of low-cost housing.

Rondebosch had its lease renewed by the city government late last year despite the presentation of some 1,830 objections by local housing rights group Ndifuna Ukwazi, which says turning golf courses over for homes is a way to tackle deep inequality.

“Using this land for the benefit of a few wealthy individuals at the expense of those in dire need of affordable housing is inefficient, unequal and unjust,” said Michael Clark, head of research and advocacy at Ndifuna Ukwazi.

Warnings by city officials that eviction is on the cards for occupiers of abandoned buildings, just months after Rondebosch’s lease was extended, have roused activists and sparked calls for cities to prioritise land use according to need.

“Golf courses occupy expansive tracts of land in well-located areas across cities,” said Edward Molopi, a researcher with the Socio-Economic Rights Institute of South Africa (SERI), which uses litigation and advocacy to support human rights.

“South African cities face an acute need for affordable housing and this land can be used to address the problem,” Molopi told the Thomson Reuters Foundation, adding that he knows of hundreds of housing evictions since lockdown began.

Nearly three decades after the end of white minority rule, South Africa remains one of the most unequal countries in the world, according to the World Bank, with urban areas still starkly divided along racial and class lines.

In other countries too, from South Korea to the United States, the swathes of green space needed for a round of golf have stirred debate around alternative uses for the land, whether apartment blocks, public parks or even vineyards.

‘NOT THE ONLY LAND’

But in South Africa, where tracts of land, including golf courses, were used as physical barriers to separate different racial groups during the apartheid regime, campaigners say repurposing such areas is key to achieving a fairer society.

Golf lovers have a choice of about 450 courses in South Africa, according to independent golf course ranking platform Top 100 Golf Courses.

They are easy to spot on a Google Maps view of the nation’s cities, many in close proximity to other golf courses, and also poorer neighbourhoods or townships.

But officials say finding space for affordable homes is more complex than repurposing golf courses.

Not all of the courses are publicly owned or suitable for residential use, said officials from the cities of Cape Town, Johannesburg and Durban. The sport also draws tourists and creates jobs, they added.

“Densification, diversification and inclusionary housing requirements in well-located parts of our cities is a more realistic approach,” said Nthatisi Modingoane, a spokesman for the city of Johannesburg.

‘SPATIAL JUSTICE’

Johannesburg’s Observatory golf course lies less than five kilometres (three miles) from Hillbrow, an inner-city suburb notorious for derelict, overcrowded buildings and crime.

People unable to afford rent end up there in “dark buildings” – properties seized by rogue landlords that offer crowded but cheap rooms, often without electricity.

“Since COVID, people need cheap rent, but if you don’t pay the landlords you get kicked out or … they kill you,” said Ethel Musonza, a housing activist who used to live in a dark building.

“There is a big need for people to be resettled in a safe place they can afford,” she added.

But the Observatory course sits on the site of an old ash dump, making it a poor site for residential construction, said club captain Simon Leventhorp.

“There is need for affordable houses but golf courses aren’t the only land available,” he said, adding that the club had a lower membership fee that other courses, making it a more inclusive space.

Some courses – like Rondebosch in Cape Town – do fit the bill for affordable housing, said Clark.

Golfers at the course can still enjoy views of the city’s famous Table Mountain from the greens, but authorities did add a two-year cancellation clause to the club’s lease if an alternative use of the land is identified.

Land used for community and recreational use, including golf courses, is currently being reviewed for possible residential sites, the city added.

In the meantime, land campaigners will continue to put pressure on state and city governments to “proactively intervene in housing markets”, said Molopi from SERI.

“This will be central to dismantling the ‘apartheid city’ and moving towards urban spatial justice,” Molopi said.

(Reporting by Kim Harrisberg @KimHarrisberg; Editing by Helen Popper. Please credit the Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers the lives of people around the world who struggle to live freely or fairly. Visit http://news.trust.org)

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UK might need negative rates if recovery disappoints – BoE’s Vlieghe

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UK might need negative rates if recovery disappoints - BoE's Vlieghe 2

By David Milliken and William Schomberg

LONDON (Reuters) – The Bank of England might need to cut interest rates below zero later this year or in 2022 if a recovery in the economy disappoints, especially if there is persistent unemployment, policymaker Gertjan Vlieghe said on Friday.

Vlieghe said he thought the likeliest scenario was that the economy would recover strongly as forecast by the central bank earlier this month, meaning a further loosening of monetary policy would not be needed.

Data published on Friday suggested the economy had stabilised after a new COVID-19 lockdown hit retailers last month, while businesses and consumers are hopeful a fast vaccination campaign will spur a recovery.

Vlieghe said in a speech published by the BoE that there was a risk of lasting job market weakness hurting wages and prices.

“In such a scenario, I judge more monetary stimulus would be appropriate, and I would favour a negative Bank Rate as the tool to implement the stimulus,” he said.

“The time to implement it would be whenever the data, or the balance of risks around it, suggest that the recovery is falling short of fully eliminating economic slack, which might be later this year or into next year,” he added.

Vlieghe’s comments are similar to those of fellow policymaker Michael Saunders, who said on Thursday negative rates could be the BoE’s best tool in future.

Earlier this month the BoE gave British financial institutions six months to get ready for the possible introduction of negative interest rates, though it stressed that no decision had been taken on whether to implement them.

Investors saw the move as reducing the likelihood of the BoE following other central banks and adopting negative rates.

Some senior BoE policymakers, such as Deputy Governor Dave Ramsden, believe that adding to the central bank’s 875 billion pounds ($1.22 trillion) of government bond purchases remains the best way of boosting the economy if needed.

Vlieghe underscored the scale of the hit to Britain’s economy and said it was clear the country was not experiencing a V-shaped recovery, adding it was more like “something between a swoosh-shaped recovery and a W-shaped recovery.”

“I want to emphasise how far we still have to travel in this recovery,” he said, adding that it was “highly uncertain” how much of the pent-up savings amassed by households during the lockdowns would be spent.

By contrast, last week the BoE’s chief economist, Andy Haldane, likened the economy to a “coiled spring.”

Vlieghe also warned against raising interest rates if the economy appeared to be outperforming expectations.

“It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.

Higher interest rates were unlikely to be appropriate until 2023 or 2024, he said.

($1 = 0.7146 pounds)

(Reporting by David Milliken; Editing by William Schomberg)

 

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UK economy shows signs of stabilisation after new lockdown hit

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UK economy shows signs of stabilisation after new lockdown hit 3

By William Schomberg and David Milliken

LONDON (Reuters) – Britain’s economy has stabilised after a new COVID-19 lockdown last month hit retailers, and business and consumers are hopeful the vaccination campaign will spur a recovery, data showed on Friday.

The IHS Markit/CIPS flash composite Purchasing Managers’ Index, a survey of businesses, suggested the economy was barely shrinking in the first half of February as companies adjusted to the latest restrictions.

A separate survey of households showed consumers at their most confident since the pandemic began.

Britain’s economy had its biggest slump in 300 years in 2020, when it contracted by 10%, and will shrink by 4% in the first three months of 2021, the Bank of England predicts.

The central bank expects a strong subsequent recovery because of the COVID-19 vaccination programme – though policymaker Gertjan Vlieghe said in a speech on Friday that the BoE could need to cut interest rates below zero later this year if unemployment stayed high.

Prime Minister Boris Johnson is due on Monday to announce the next steps in England’s lockdown but has said any easing of restrictions will be gradual.

Official data for January underscored the impact of the latest lockdown on retailers.

Retail sales volumes slumped by 8.2% from December, a much bigger fall than the 2.5% decrease forecast in a Reuters poll of economists, and the second largest on record.

“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.

The smaller fall in retail sales than last April’s 18% plunge reflected growth in online shopping.

BORROWING SURGE SLOWED IN JANUARY

There was some better news for finance minister Rishi Sunak as he prepares to announce Britain’s next annual budget on March 3.

Though public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, it was much less than the 24.5 billion pounds forecast in a Reuters poll.

That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting a surge in spending and tax cuts ordered by Sunak.

The figure does not count losses on government-backed loans which could add 30 billion pounds to the shortfall this year, but the deficit is likely to be smaller than official forecasts, the Institute for Fiscal Studies think tank said.

Sunak is expected to extend a costly wage subsidy programme, at least for the hardest-hit sectors, but he said the time for a reckoning would come.

“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.

Some economists expect higher taxes sooner rather than later.

“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.

Public debt rose to 2.115 trillion pounds, or 97.9% of gross domestic product – a percentage not seen since the early 1960s.

The PMI survey and a separate measure of manufacturing from the Confederation of British Industry, showing factory orders suffering the smallest hit in a year, gave Sunak some cause for optimism.

IHS Markit’s chief business economist, Chris Williamson, said the improvement in business expectations suggested the economy was “poised for recovery.”

However the PMI survey showed factory output in February grew at its slowest rate in nine months. Many firms reported extra costs and disruption to supply chains from new post-Brexit barriers to trade with the European Union since Jan. 1.

Vlieghe warned against over-interpreting any early signs of growth. “It is perfectly possible that we have a short period of pent up demand, after which demand eases back again,” he said.

“We are experiencing something between a swoosh-shaped recovery and a W-shaped recovery. We are clearly not experiencing a V-shaped recovery.”

($1 = 0.7160 pounds)

(Editing by Angus MacSwan and Timothy Heritage)

 

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