Article by Mr. Aviv Handler of ETR Advisory published 28th July, 2014.
The acronyms “EMIR”, “REMIT”, “MiFID II” and others have now been flashing in front of us for quite some time, and in February we lived through the first go live of EMIR Trade Reporting. Many in the energy and commodities market found the requirements confusing and the lack of clarity made compliance harder than it could have been.
There is plenty more still to come, causing a great deal of bewilderment. REMIT looms large, with the Implementing Acts, due in November, set to trigger deadlines in May and November 2015. And the confusion around EMIR is not finished, with low matching rates, continued lack of clarity over what commodities data really looks like.
And so, many in the market are feeling a bit conflicted: On the one hand, lack of clarity, constantly changing rules and endless deadlines instil a combined sense of an uphill struggle and panic. On the other, we have all lived to tell the tale of EMIR reporting, which has exhibited a distinct lack of disaster.
So the question is, do we panic, or are things not quite as bad as they seem?
Almost 6 months after the initial deadline, the evidence suggests that most market participants have “some sort of” trade reporting process going.
Some have a very smooth process, with all trades being reported, possibly using an automated system. Any issues are flagged up for investigation, and all is ready for the valuations and collateral deadline in August, should it apply. At the other end of the spectrum, some will not even realise that they are under EMIR. Some will only manage to report sporadically, manually and with most trades in error.
For the most part however, market participants will be somewhere in between these extremes. This applies not only to Trade Reporting but to the EMIR Risk Management measures too. Most are continuously refining their processes. Never the less most of the market is not complying perfectly.
What is striking though is the lack of “noise”. Surely by now, with most of the market still not at a 100% compliance rate we would expect some pressure from regulators, authorities and others.
A phoney silence?
There have been various “noises” that some fines are coming, and that is to be expected at this stage. Regulations tend to go through various stages as they get introduced, typically:
– Grace period from regulator
– Small fines for technical non-compliance (e.g. sending badly formed data, or missing deadlines)
– Serious fines
EMIR is no different, and we can expect the regulator to start tightening up in the near future.
Is there something else we should already be doing?
Even for those who are in reasonable shape, there is always more that could be done. Clearly everyone needs to be ready for a regulatory inspection, and to be able to prove that data is being sent correctly and checked. The list of potential preparations is infinite, and there is an endless list of work one could undertake to be “more compliant”.
It is easy to forget that in general regulators are reasonable people. There are no prizes for being “over compliant”. Either you comply, or you don’t. How much money you spend is of no benefit, once you reach a compliant level.
There will be a clean bill of health if you are complying correctly. But there will be no extra prize for going overboard. Unnecessary work leads to unnecessary spend.
What is coming? Should that make us panic?
There are several more deadlines coming over the next years. REMIT will cause a great deal of work, not only in terms of trade reporting but also due to the increase surveillance that will be required. MiFID II will also have an impact on the commodity and energy trading market, with the rules currently in formation. The introduction of mandatory clearing will eventually have an impact on all in the market, no matter what their size.
With constant work and deadlines, plus the threat of fines under EMIR, is it now time to panic? Or perhaps it is time to invest in a huge programme of activity, so make sure that no stone in unturned, and that we comply in every conceivable manner. It is tempting to do huge studies involving dozens of people to assess impact, action and plans.
Should be we driven by a fear of fines?
It is important to ask ourselves why we comply in the first place. Is it to avoid fines? Or is compliance a goal in itself? In reality both approaches end up in the same place. But there is an incredibly important potential difference in attitude.
Those who approach the rules with an attitude of “fine avoidance” are more likely to adopt practices that are on the one hand inconsistent, but on the other over burdensome. This approach leads to panic, which in turn leads to overspend on unnecessary work. In fact, this approach can lead to a higher risk of fines.
On the other hand, those who approach the rules because they feel that compliance is a good thing, are more likely to adopt a sensible even keeled approach. If the objective is solid consistent compliance, but no more, many mistakes, and extra costs are avoided.
Who wants us to panic anyway?
In whose interest is it for a participant to panic, overreact and overspend? It clearly is not in the regulators’ interests. I know of no regulator that wishes for the rules to be expensive to implement, or for compliance to be more complex than it needs to be.
Of course it is often the case that compliance can actually be expensive, and many could be of the view that the rules are complex. But that is not the intent. A regulator wishes participants to comply, not to overspend.
However there are other parties who may have considerable interest in panic, and overspend. These range from those inside a company with a particular agenda, to some management consultancies and some technology companies. In general, one needs to watch out for organisations that benefit from a higher level of panic. If you look these are not hard to spot.
Using some common sense
There is an easy way to avoid panic and overspend, and that is to use common sense. Of course one should study what preparations need to be made to comply, but such investigations and planning should suit the size of the problem. You would not carry two spare tyres in your car. Similarly you do not need to go overboard in your compliance programme.
Yes, you need to make sure that all data is reported on time in a consistent fashion. But perhaps you don’t need five management consultants auditing your testing plans.
As with life in general, a balanced approach usually works best.
The net result
Taking all these thoughts together, the message is that the objective of a compliance programme should be to comply. Understand the rules, the implications for your organisation and the preparations that you need to make. Pick the right technology suppliers. Run your programme well and keep it balanced.
Many will try to persuade you to carry out unnecessary work. When they do remember, that your interests lie in compliance. No more and no less.