This article was published as a ComtechAlert newsletter on the 4th December. The ComtechAlert newsletter goes out twice a month and you can subscribe to it here.
By Gary M. Vasey & Aviv Handler (ETR Advisory)
For us, 2013 was the year of regulatory readiness as several regulations were about to hit the European commodity trading industry. As we conducted our research into the impacts of regulations such as EMIR, REMIT and MiFiD2 (1) (kindly sponsored by TriOptima) however, it became clear that this view wasn’t necessarily shared by all of our colleagues across the industry. Many, it seemed, had their heads buried firmly in the sand.
The first observation was that it was very difficult to get responses to the survey component of our study. People either didn’t want to respond or didn’t feel it important enough to respond. Other polls and surveys suffered from the same reluctance or malaise we discovered as we discussed it with other firms around the industry. After almost 6-months of polling however, we decided to analyze what we had – some 32 responses that we deemed to be valid (2). The results confirmed what we already knew – Brussels – we may have a problem.
From our results and those of other surveys we are aware of, we can approximate and say that about a third of the industry thinks itself in compliance and ready for the new regulations, one third is working on being in compliance and the last third hasn’t done anything at all. We have heard comments such as “We will do something when we are certain its going to happen.” Well, it is happening. EMIR entered into force on 16 August 2012. The European Securities Market Authority (ESMA) implements EMIR, and the local National Compliance Authorities (NCAs), such as the UK FCA, enforce it. The Regulatory Technical Standards to implement many of the rules were proposed in December 2012 and subsequently approved by the European parliament in February 2013. Furthermore, on the 6th November 2013, ESMA approved four trade repositories and two more have subsequently been approved. Trade reporting begins in February next year, unless the European Parliament agrees to a delay, which is highly unlikely.
Our findings show an industry still unprepared to calculate EMIR thresholds (despite that being a requirement since March), calculate mark-to-market/model if over the threshold, handle portfolio compression or optimization and ill prepared to report trade data come February. How can this be?
According to our sample, only 65% of the respondents are actually aware of the regulations. Again, given the amount of coverage of the regulations in the media and the industry, this seems surprising. Furthermore, less than half the respondents have any sort of an action plan to deal with the regulations and only just over a third of respondents have a plan that crosses IT and business boundaries.
EMIR is already in force but only around half of the respondents can calculate where they sit with respect to the threshold and almost 1 in 10 cannot perform the calculation. Around 40% are in compliance with the new trade confirmation requirements but only 4 respondents felt they could comply with the new stricter requirements coming in.
It seems that the manner in which the regulations have been rolled out – a sort of top-down approach filling in vital details through time – has created the impression that the requirements are uncertain and perhaps, they yet may not happen at all. Alternatively, if they do, the deadlines will continue to be pushed backwards because of lack of details and the slow progress defining those details. There does appear to be confusion about the details of the regulations, how they are to be implemented and whether in fact, the deadlines will continue to move backwards.
Our survey data also shows that many expect the regulations to increase costs and decrease their trading activities. While the data originates from a small number of firms impacted by the regulations, many see higher margin costs curtailing their trading volume and the costs of technology and support affecting their bottom line.
The overwhelming conclusion of the survey must be that the industry has yet to properly prepare in many quarters for these regulations. In fact, an additional observation is that while vendors and service providers seem to have invested in developing new solutions (reporting, threshold calculations, trade surveillance tools and so on), they too have yet to see the interest levels that they originally may have expected.
The survey is now issued as European Commodity Market Regulations: Implementation, Impacts and Solutions, report part 2 by ComTech Advisory and ETR Advisory and kindly sponsored by TriOptima and may be downloaded free at www.ctrmcenter.com