Waiting for EMIR

Safe to say the general gestalt of the industry is DOUBT.

Officially, companies are supposed to be sending trades over to a “Trade Repository” or TR by January 2014.  We are considering taking spread bets.

Waiting for EMIR

Here’s what we learned from Dodd Frank in the US:

TR submission is inextricably linked to the Electronic Confirm Process.  If you have to report OTC trades staying with a manual confirm process is a ticket to pain.  Plan for some re-design work around how OTC trades are confirmed and submitted.

Like Dodd Frank there are a pile of TR “contenders.”   Most likely won’t make it.  Why?  Well, like the US, there is operational efficiency in a confirmation + TR reporting.  Likewise, there is just not market (read money) mass for 9 TRs.

Firms should have a decent amount of skepticism around “easy” when it comes to both initial reporting on ongoing changes.  Take a look at Commissioner O’Malia’s comments here under the section “Attacking the Data Dilemma”.  Essentially he articulates that data non-standardization is the Achilles heel of trade reporting.  Many in the US selected an SDR that was easy to report to because the SDR did not standardize values.  We see this as mortgaging the workload.  If you picked an SDR that does a poor job of standardization you are just going to overhaul everything when they are forced to standardize.

What we think is going to be different under EMIR is that it is firms will likely report to multiple SDRs.  The product coverage under EMIR and REMIT is very wide and the ability for TRs to accommodate every single possible trade permutation is doubtful.  But here’s who we think are the major contenders.

EFET > DTCC COMBO: EFET already has a lot of confirm volume in Europe.  But, we are not expecting a target TR test environment to EFET until August.  This leaves 4 sweet months to meet compliance.  Somewhat doubtful that EFET will be able to incorporate FX deals into the commodity mix.  So it could be that firms may have to send some trades to EFET and FX trades over to DTCC directly.

ICE ECONFIRM > TRADE VAULT:  The feedback from participants in the US have been happier with the ICE/Trade Vault Combo than any other SDR.  Part of this could be because many firms were already somewhat familiar with the eConfirm process. But also the platform was more stable and ICE employees more familiar with complex commodity trades.  (I’m not suggesting there were no challenges…there were.  But they were far lower than other SDRs).   We are expecting ICE to expand its product footprint for EMIR to at least include FX trades.  This is a big plus.  Likewise we are expecting them to get fully underway and ready for TR connectivity by late July.

CME: A bit of a dark horse in the US.  CME was a little late to the game and under-marketed.  This is a mistake we don’t expect them to make twice.  Not only is CME a TR in and of itself, but they can also route submitted trades to DTCC.  Furthermore, product coverage is large out of the box.  There is also some natural advantage the futures exchanges have over others.  EMIR has a much wider reporting footprint than Dodd Frank.  So if your company is doing a significant volume on ICE or CME then it is likely that they can facilitate reporting of these products.

OTHERS:  I am not suggesting that others won’t show for TR reporting.  But our current read is that if they show for EMIR they will be loss leaders.

Our final bet.  When is EMIR going to go “Live?”   Mid Q1 2013.  We think that betting on anything later is overly optimistic.