On June 23rd a further ESMA Q&A update was published and unlike the May update, this latest version did have a number of changes relating to Trade Repository reporting, though still maybe not so many as financial services firms had hoped for.
Some useful clarifications are given regarding mark to market and collateral reporting:
- Mark to market value is clarified as being the absolute value of the marked position, rather than, as some have suggested, the unrealised p&l or the mark to market price
- The collateral reported should be the total market value posted by the reporting counterparty and, for avoidance of doubt, it is stated that this should include both initial margin and variation margin
- The meaning of the Collateralisation field values, which has been subject to much speculation, is covered in some detail. Where margin is just received rather than posted, collateral values can be left blank and the collateralisation field will be set to Uncollateralised (U) from the perspective of the reporting firm
- Collateral/margin portfolios which are maintained in multiple currencies should be converted to a single currency pool for reporting, with the currency chosen as that which has greatest weight in the portfolio
Less helpful is the guidance given on contracts with no maturity dates (CFDs) in the new TR Answer 34. This has the potential to confuse reporting firms into treating new reportable trades as no more than position adjustments on previous trades. The question asked is how partial closures of open CFD contracts should be reported. The answer suggests that only initial trades should be reported and that subsequent adjustments of the resulting position should be addressed by modifications of the quantity, though not the price, of the original trade.
In fact the only action, which would reduce a long position, which is the result of a buy trade, is an offsetting sell trade, which as an independent Execution at a different time, price and quantity, is actually a separately reportable transaction. To simply modify the original trade would be to miss the reporting of the new one. To modify the original and also report the new trade would give a misleading impression of the aggregate open position. One compliant approach would be to use the compression mechanism, reporting then cancelling both trades (with Action Types N and Z for each trade) and then reporting the resulting compressed position with Action type N. Unfortunately the compression mechanism is not referenced in the Q&A guidance on CFDs. This is unfortunate as this is the first guidance given for retail derivative products, and as a consequence is likely to be seized upon by retail derivatives brokers.
Time is now running short before collateral and valuation reporting are due to start, and given the gaps in guidance (are zero positions reportable and if so should you call them a buy or a sell?) all parties will need to make sensible assumptions and retain the flexibility to revise them rapidly should further information come to light.
